Skip to main content

Full text of "Business law [microform]; a working manual of every-day law"

See other formats


MASTER 
NEGATIVE 

NO. 94-82031 




COPYRIGHT STATEMENT 



The copyright law of the United States (Title 17, United States Code) 
governs the making of photocopies or other reproductions of copyrighted 
materials including foreign works under certain conditions. In addition, 
the United States extends protection to foreign works by means of 
various international conventions, bilateral agreements, and 
proclamations. 

Under certain conditions specified In the law, libraries and archives are 
authorized to furnish a photocopy or other reproduction. One of these 
specified conditions is that the photocopy or reproduction is not to be 
"used for any purpose other than private study, scholarship, or research." 
If a user makes a request for, or later uses, a photocopy or reproduction 
for purposes In excess of "fair use," that user may be liable for copyright 
infringement. 

The Columbia University Libraries reserve the right to refuse to accept a 
copying order if, in its judgement, fulfillment of the order would involve 
violation of the copyright law. 



Author: 



Conyngton, Thomas 



Title: 



Business law 



2v 



Place: 



New York 

Date: 

1920 



MASTER NEGATIVE « 



COLUMBIA UNIVERSITY LIBRARIES 
PRESERVATION DIVISION 

BIBLIOGRAPHIC MICROFORM TARGET 



ORIGINAL MATERIAL AS FILMED • EXISTING BIBLIOGRAPHIC RECORD 




tm4 ^»«>auaUir 



I 



Conyngton, Thomas. 

Business law; a workin^^ manual of evcry-day law, by 
Tlionuis Conyn^ton ... iM od. Xew ^'ork. The Ronald 
pross ronipaTiy, 1920. 

2 V. 22'"^. 

f 'aRcd contimioiisly. 



1. Commercial law .U. S. 2. !«i\\--U. S. 

IJI>rarv of Conpress ^ ITF1239.C63 1920 

- UUJU' z. 

- ■ % 

CoiiyriRltt A SfiSfiW) ^ ,4- 



20-73&f 



RESTRICTIONS ON USE: 



HLM SIZE 



• -K-^w? yv| 



V^ 



TECHNICAL MICROFORM DATA 



REDUCTION RATIO: 



. n>^ 



DATE RLMED 



: #fa 



IMAGE PLACEMENT: Ia/i^ 



IB IIB 



INITIALS: C 




( 



TRACKING * : MSU Ml^^ ^ Mi,V\ OO^If 



RLMED BY PRESERVATION RESOURCES. BETHLEHEM. PA. 






w^^ 







in 

3 
3 



0) 

cr 

1 1' ■■■■■■' 

lOQ Q 

■■■■Ml m «■■■■ 



o -p 
ro ^ 

N (/) 

en 

00 M 

o 






cn 

3 
3 



> 

CD 

0) O 

o rn 

(D O 
OfQ 



(Jl3 ^ 

^-2 o 

MHHI 






N 



rsi 



^ 



•^i 



> 



"i^. 



^ 









*fV7^ 






^^. 



> 



V 



^^: 



^ 



C*l 



W 






3 
3 



o 

3 

3 









> 

Ui 




S 

3 
3 






% 











O 






00 



o^ 



iiiiig m m 



s ig 



1.0 mm 



"^^ 1.5 mm 



2.0 mm 



ABCDEFGHIJKLMNOPQRSTUVWXYZ 
sbcdetgt)i|><lnnnopqrstuvw«yz 1234567890 



ABCDEFGHIJKLMNOPQRSTUVWXYZ 
abcdefghiiklmnopqrstuvwxyzl234^67890 



ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

1234567890 



<^A 
*' ^^j 




^^^A 

%f^ 







^ 



fp 



m 

H 

O 
O 

■Tl m Tj 
OL,"0 

> C c*> 
I TJ ^ 
0(/) ; 

m 

i! 
o 

m 



/<^ 



^^. 



ABCDEFGHIJKLMNOPQRSTUVWXYZ 
abcdefghijklmnopqrstuvwxyz 
2.5 mm 1234567890 



^ 



^j^^%. 
^^t^ 



'iy 



'4' 



'^ 







1— * 


i^a 


ro 


• 


• 


• 


cn 


o 


cn 


3 


3 


z 


3 


3 


n 


% 


ABCDE 
cdefghi 




2.m 




c 


FGH 
jkim 


3l 
n3 ^ 




ii 




CJ 


|i 


LMNOPQRS 
>qrstuvwxyz 


cn 
a> 
^. 
00 










o^x 






^-< 




00 IM 

8 


cn< 




CT^X 






^-< 






OOM 





-A# 



8 



^%v 

^/^f^ 



jOV^o C76\l 

fatt)tCitpof^tog«* 



LIBRARY 




School of Business 



\ 



ill 



IIM 

Pi 

m 



[f 




i ' 



\ 



Business Law 



A Working Manual of E very-day Law 



By 



THOMAS CONYNGTON 

Of the New York Bar; Author of " Corporate Organization 
and Management," " The Modem Corporation," etc. 



VOLUME I 




SECOND EDITION 



NEW YORK 

THE RONALD PRESS COMPANY 

1920 






Copyrigiit, 1918, by 
The Ronald Pbess Company 



Copyright, 1920, by 
•The Ronald Piess Company 



AU RigMs Raenti 



JL 150 



C1U\ 



V* I. 



PREFACE 

Law and order are the necessary foundations for civilized 
life. A pastoral people with few possessions needs few and 
simple laws. A populous, modem state with complex social, 
industrial, and commercial relations requires intricate and far- 
reaching regulations. In this country the latter condition 
prevails, and our present legal system has not kept pace with 
our perhaps too rapid progress in other ways. 

Our system of laws is an inheritance from our Anglo- 
Saxon ancestors, supplemented by written constitutions and 
multitudinous legislative enactments. Much of our law is 
judge-made. Like our forebears, we revere precedents and 
decisions and have more of this kind of law than we know 
how to use. We have our federal courts and forty-eight 
separate state systems, all grinding out innumerable volumes 
of reports. In consequence, this source of law has become 
cumbersome and somewhat unmanageable. Beyond this we 
are subject to the Constitution of the United States with its 
eighteen amendments, as well as the constitutions of our 
individual states ; to the enactments of Congress and to those 
of our state legislatures ; to the ordinances of boards of alder- 
men; to the regulations of boards of health and education; 
and to the orders of many other boards, bureaus, commissions, 
and officials. With the multiplicity of regulation that all this 
entails, it requires no small amount of care and study to avoid 
unwitting entanglement in the far-extended meshes of the 

law. 

Yet from this unwieldy mass of law may be elicited cer- 
tain guiding principles that everyone should know— general 

rules that will guide us safely past most of the difficult places. 

**• 
lii 



i 



I \ 



IV 



PREFACE 



Knowing these, it is possible for a man so to shape his business 
course and his relations with his fellows as to have little to 
do with courts or lawyers. Courts and lawyers are necessary 
institutions — so are doctors and hospitals— but all of us prefer 
to avoid both so far as possible and so long as possible. 

It is the admirable theory of the law to secure right and 
justice to all men. The practical application of the law 
through the courts, however, does not always attain these 
ends. Some reasons for this are set forth in the following 
pages. Also suggestions are given as to how one may shape 
his conduct and manage his affairs in order to avoid the more 
serious legal difficulties. The man or woman who owns prop- 
erty, who does business and engages in affairs, should know 
the principles upon which our law is based, should know how 
to apply these principles to the more usual happenings, and 
should know when and how to employ "counsel learned in the 
law." The advice here given is, as near as may be, such 
as would be given by a conscientious lawyer who desired to 
keep his clients out of the courts, rather than to win cases. 
All men should know some law, and it is devoutly to be hoped 
that the day will come when even those who write romances 
and photo-plays will know enough law to avoid the pre- 
posterous legal situations that cause so much trouble to their 
heroes and heroines. 

To better adapt the book to the needs of those intending 
to become professional accountants, the C.P.A. examinations 
of the various states for the past five years have been ex- 
amined and, where necessary, the text has been expanded to 
cover all the more important questions. Many of the questions 
given in these examinations refer purely to local statutes, and 
answers must be found in the laws of the state in which the 
examination is held. In such cases the fact has been indicated. 
Other questions, outside the scope of this work, are apparently 
brought in by the examiners for the purpose of keeping quali- 



PREFACE V 

fied students from receiving the C.P.A. degree. This seems 
a hard thing to say but The Journal of Accountancy for 
October, 1919, expresses editorially the same opinion: 

Apparently some state boards in the past have been chiefly 
concerned with an effort to convince the public of their 
innate cleverness. They have presented questions which it 
would be ridiculous to expect a candidate to answer with- 
out reference to authorities, and as a result they have ex- 
cluded many men fully qualified to practice as public 
accountants. Out of this condition has grown the quite fre- 
quent allegation that accountants are trying to build up a 
close corporation by preventing newcomers. 

To assist students of business law, questions have been 
appended to each chapter. Some of these have been taken 
from C.P.A. examinations, some are intended to provoke in- 
quiry rather than direct answers, and others are the usual type 
of review questions. 

The author desires to acknowledge his indebtedness to 
Elizabeth A. Smart of the New York Bar for her valued 
collaboration on the first edition of this work; to W. J. 
Grange, of the New York Bar, for careful reading and helpful 
comment; to P. W. Pinkerton, of Indianapolis, for his many 
excellent suggestions and improvements in the text; to James 
H. Wilhoit, of the New York Bar, for assistance in pre- 
paring the chapter on bills of exchange; and to Katharine 
S. Keane, for careful and intelligent research in connection 
with the preparation of this edition and for good work in 
the compilation of the index. 

The author desires further to extend his thanks and testify 
his appreciation of all those interested readers throughout 
the country who by their questions and comments on the 
original text have enabled him to make the present edition 
more accurate and comprehensive than would otherwise have 



VI 



PREFACE 



been possible. He bespeaks for the present volumes a con- 
tinuance of their kindly interest 

Blackstone has said in his famous Commentaries that "the 
science of the law should in some manner be the study of 
every free citizen." If this work can make plain to its readers 
some of the practical features of the law under which we 
live, so that they may appreciate its virtues and know its 
faults, and from that knowledge may, by their influence and 
votes, strive to simplify its procedure and remedy its defiden- 
cies, the book will have served its end. 

Thomas Conyngton 

New York City, 
March i, 192a 



CONTENTS 



VOLUME I 

Part I— The Law of the Land 

Chapter 

I Evolution of Law . . . . . 
§ I. Definition 



Page 
3 



2. The Origin of Law 

3. Law and Liberty 

4. Sources of J^w 



n The Written Law 
§5. Definition 



6. Constitutional Government 

7. The United States Constitution 

8. Laws of Congress 

9. State Constitutions 

10. Constitutional Amendments 

11. Constitutions that Legislate 

12. Legislative Enactments 

13. Statute Law 

14. Subsidiary Laws 



ni The Unwritten Law 
(15. Definition 



IS 



16. The Doctrine of Precedents 

17. Court Reports 

18. The Volumes of Reports 

19. Citations 

20. The Common Law 

21. Law-Merchant and Commercial Law 

22. Unconstitutional Laws 

23. The Recall of Judges 



IV Law and Equity 

§ 24. Remedial Law 

25. Equity in the Legal Sense 

26. Suits at Law and in Eqiiity 

27. Bringing a Suit at Law 

28. Trial at Law 

29. Bringing a Siait in Equity 

30. Appeals to a Higher Court 

31. AdvisabiUty of Litigation 



22 



Criminal Law 

§ 32. Criminal Procedure 

33. Classes of Offenses Against the Criminal Law 

34. Penalties 

vH 



35 






CONTENTS 



CONTENTS 



i 



IX 



Part II — Contracts 

Chapter 

VI Essential Features oi a Contiact 

$35. Introductory 
36. Definition 
37 Essential Features 

38, Competency of Parties 

39. The Subject Matter Must be Lawftu 
4a The Law of Place ^ 

41. The Subject Matter Must Exist 

42. Agreement of the Parties 

43. Oral Agreement 

44. Consideration 



Pace 
4» 



Yn How Contracts Are Made . . . 
§ 45. Classification of Contracts 
46. Oral Contracts 
.47. Written Contracts 

48. The Statute of Frauds 

49. Contracts Under Seal 

50. Contracts of Record 

51. Express and Implied Contracts 

52. Quasi Contracts 

53. Executory and Executed ContfBCts 

54. Conditions Precedent and Subsequent 

55. Void and Voidable Contracts 

56. Drafting a Contract 

VIII Effect of Contracts . . . • 

§57. Illegal Contracts 

58. Effect of Mistakes 

59. Effect of Fraud 

60. Duress 

61. Undue Influence 

62. Law as to Alteration 

63. Interpretation of Contracts 



S^ 



68 



Chapter 
XII Actions on Contracts— General Rules 

§ 73. Introductory 

74. Specific Performance 

75. Rules of Evidence 

XIII Tender of Payment or Performance . 

S 76. Definition 

77. Time to Tender Performance 

78. Extent and Kind of Tender 

79. Acceptance of Tender 

XIV Joint and Several Contracts .... 

§ 80. Contracts Made by More Than Two Parties 

Part III— Sales 



Page 
103 



III 



"5 



XV Contracts to Sell 

§ 81. Sales and Contracts to Sell . 

82. Uniform Sales Act 

83. What is Necessary to the Contract of Sale 

84. The Agreement 

85. Sales to Persons Incompetent to Contract 

86. The Consideration 

87. Nature of Subject Matter 

88. Destruction of Subject Matter 

89. Sales to Arrive 

90. A Contract of Sale Must Be Legal 



121 



IX Assignment and Novation . 

§64. Assignment of Contracts 
65. Novation 

X Discharge of Contracts 

§ 66. Discharge by Performance 

67. Discharge by Agreement 

68. Discharge by Various Other Causes 



• • • 



79 



84 



1 



XI Enforcement of Contracts 
1 69. Breach of Contract 

70. Remedies for Breach of Contract 

71. Law Governing Remedy 

72. Statute of Limitations 



93 



XVI Passing Title 129 

§91. Delivery 

92. Selection Necessary to Delivery 

93. When the Title Passes 

94. Sales Without DeUvery 

95. Conditional Sales 

96. State Laws on Conditional Sales 

97. Requirement of Affidavits to Conditional Sales 

Contracts 

98. Rights in Illinois and Pennsylvania 

99. Protection Against Landlord's Lien 

100. Protection Against Destruction of Property 

XVII The Statute of Frauds 138 

§ 1 01. Description of the Statute of Frauds 

102. Contracts to S^U 

103. When the Contract of Sale Must be in Writing 

104. Exception for Part Pajrment 

105. Exception for Part DeHvery 

106. Exception for Amounts Below Specified Value 

107. Exception for Work or Services 



»• 



X CONTENTS 

Chapter 

XVIII Warranties 

§ io8. Introductory ^ 

109. Conditions Precedent 

110. Conditions Subsequent 

111. Express Warranties 

1 12. Implied Warranties 



Page 
144 



Chapter 



XIX Remedies 

§ 113. Rights of Unpaid Seller Under the Contract 

114. Rights of Buyer 

1 15. R^dssion of Sale 

XX Sales at Auction 

5 1 16. Regulations for Sales at Auction 

1 1 7. Compliance with Conditions 

118. Duties of Auctioneer 



iSi 



tS9 



Part IV— Agency 



XXI Principles op Agency • » 

'- 1 1 19. Introductory 

120. Definitions 

121. The Principal 

122. The Agent 

123. General Agents* 

124. Special Agents 

125. Del Credere Agents 

XXII The Contract of Agency 

§ 126. Appointment 

127. Express Appointment 

128. Implied Appointment 

129. Ratification 

130. Sealed Contracts 

131. Appointment of Subagents 

132. Servants and Employees 

133. Void Contracts of Agency 

XXIII The Principal 

1 134. Principars Duty to Agent 

135. Prindpal's Duty to Third Piuty 

136. Principal's Liability 

137. An Undisclosed Prmdpal 

XXIV The Agent . . . . . 

f 138. Agent's Duty to Principal 
139- Agent's Obedience 

140. Agent's Good Faith 

141. Agent's Care, Skill, and Diligence 

142. The Agent's Signature 



i6s 



CONTENTS 



1 143. Agent's Duty to Third Party 

144. Limitation of Agent's Authority 

145. Agent's Fraudulent Conduct 

146. Agent's Liability 



Page 



XXV The Third Party 

( 147. Third Party's Relation to Agent 
148. Third Party's Relation to the Principal 

XXVI Termination of Agency .... 

§ 149. Termination by Fulfilment 

y 150. Termination by Either Party 

151. Termination by Disability 

152. An Agent with an Interest 



Part V — Negotiable Instruments 



ao3 



305 



XXVII Form and Interpretation 



ai3 



«73 



} 153. The Quality of Negotiability 

154. Signature 

155. Unconditional Promise 

156. Certainty as to Sum 

157. Payable on Demand 

158. Certain Future Time 

159. Payable to Order 

160. Payable to Bearer 

161. The Date 

162. Consideration 

163. Delivery 

164. Rules of Construction 
i6k. Allowable i^rovisions 
166. Non-Essentials 



i8t 



188 



XXVIII Negotiation 

§ 167. Method of Negotiation 

168. The Indorser's Contract 

169. Blank or Special Indorsement 

170. Restrictive Indorsement 

171. QuaUfied Indorsement 

172. Conditional Indorsement 

173. EfiEect of Indorsement 

XXIX Rights of Holder ...... 

1 174. Holder in Due Course 

175. Defects of Title 

176. The Rights of a Holder in Due Course 

177. Effect of Irregular Transfer 



322 



226 



Xll 



CONTENTS 



CONTENTS 



xm 



Chaftek 

XXX Liability <i» Pasties 



Pace 

399 



Chaptee 
XXXVI Bank Checks 



Page 
357 



A A. Ai 1 



1 178, Liability of Maker 

179. Liability of Indorser 

180. Discharge of Indorser 

181. Liability of Guarantor 

183. Liability of Accommodatioii Signer 

Pkesentment for Payment 

1 183. Necessity of Presentment 

184. Requirements for Presentment 

185. Presentment Excused 

186. When Due 



9$4 






XXXII Notice of Dishonor 

1 187. Necessity of Notice 

188. Effect of Notice 

189. Form of Notice 

190. Time of Notice 

191. Where to Send Notice 

193. When Notice Is Not Required 
193. Protest 

XXXni Discharge of Negotiable Instruments . 

§ 194. When Discharged 

195. When Not Discharftd 

196. Effect of Alteration 

XXXIV Promissory Notes ...••• 

§ 197. Definition 

198. Liability of Maker 

199. Interest 

300. Demand Notes • 

301. Effect of Renewal 

303. Note as a Gift 

XXXV Bnxs OF Exchange and Acceptances 

§303. Definition 

304. Liability of Maker, Drawer, and Acceptor 

305. Acceptance 

306. Dollar Acceptance 

307. Bank Acceptances 

308. Domestic Bank Acceptances 
* 309. Trade Acceptances 

3lOw The Discount of Acceptances 

311. Rules for Discoimt of Bank Acceptances 

313. Rules for Discount of Trade Acceptances 

313. The Drawee 

314. Presentment for Acceptance 

315. Protest for Non-Acceptance 
216. Bills in a Set 



m 



S4S 



343 



1 217. 
218. 

219. 

320. 
321. 
222. 
223. 
22d. 
325. 
326. 



Definition 

Checks as Evidence of Payment 

Signature of Drawer 

Presentment for Payment 

Bank's Relations with Depositor 

Bank's Relations with Holder 

Revocation 

Certification 

Fraud 

Checks as Gifts 



Part VI — ^Insurance 



XXXVII Fire Insueance 



267 



§ 227. The Parties 

228. Nature of the Contract 

229. Agents 

230. The Policy 

231. Premiums 

232. The Property Insured 

333. Warranties and False Re-»resentations 
234. Settlement of Losses 



XXXVIII Lite Insurance 



280 



149 



§ 235. Nature of Contract 

236. Insurable Interest 

237. The Parties 

238. The Policy 

239. Premium Rates 
Agents 

Right to Change Beneficiary 
Assigimaent of PoUcy 
Settlement of Losses 
Government Insurance for Soldiers and Sailors 



240. 
241. 
242. 

343. 
344. 



XXXIX Sundry Insurance Contracts 



990 



5245. 
246. 

247. 
348. 
349. 
350. 
351. 
352. 

253. 

254. 

255- 
356. 



Enumeration 

Marine Insurance 

General and Particular Average 

Accident Insurance 

H^th Insurance 

Group Insurance 

Liability Insurance 

Title Insurance 

Burglary Insurance 

Plate Glass Insurance 

Automobile Insurance 

Other Forms of Insurance 



XllF 



CONTENTS 



Part VII— Employment 



Chaptek 

XL The CoimACT of Ehployment ..... 

§357. Introduction 

358. Definition 

359. What Constitutes a Contract ci Einp]o]mient 

360. Independent Contractors 
36i. Interpretation of Contract 

363. An Express Contract Cannot be Proved by Custom 

363. Wages 

364. Modification of Contract 

365. When Contract Begins 

366. Termination of Contract 

367. Termination of Contract by Breach 

368. Rights and Remedies • 

369. Employment after Expiration of Contract 

XL! RxiATiONS OF Parties 

§ 270. Duties of Employee to Employer 

271. Duties of Employer to Employee 

272. Presumption with R^ard to Joint Owners 

273. Wages 

374. Fines, Deductions, etc 



Page 

JOI 



313 



XUI Employer's Responsibility 

§375. Introductory 
276. Doctrine of Asstmiption of Risk 

377. Doctrine of Contributory N^ligenoe 

378. The Fellow-Servant Rule 

379. Employers' Liability Acts 

380. Workmen's Compensation Acts 

381. Modem Statutory Law 

382. Schedules of Compensation 

383. Who are Entitled to Compensation 

284. Employer's Defenses Taken Away by the New Act 
385. Third Persons 



3^ 



Ptrt VIII— Partnership 

XUU Introductory . . . . ' 

§ 286. Definition 
387. Partnerships Distinguished from Non-Partnership 
Organizations 

XOV The Contract of Partnership 

f 388. Parties 

389. Kinds of Partners 

390. Partnership Contracts 

291. The Firm Name 

292. Partnership a Personal Relatioii 

293. Classification of Partner^ps 



339 






CONTENTS 



XV 



Chapter 

XLV Partnership Property 



§ 294. Nature of Partnership Property 

295. Liability of Partnership Property for Debts 

296. Profits 



Page 
353 



XLVI Powers and Liabilities of Partners 

S 297. Powers of Partners 

298. Liabilities to Copartners 

299. Intra-Partnership Relations 

300. Liabilities to Third Persons 



361 



XLVII Termination of partnership 

§ 301. Termination by Agreement 

302. Enforced Dissolution 

303. Winding up the Business 



368 



Part IX— Corporations 



XLVIII Nature of Corporations 



§ 304. Corporate Entity 

305. Classification 

306. Corporations Without Capital Stock 

307. Corporations With Capital Stock 

308. Distinctive Features 

309. (i) Creation by the State 

310. (2) Limited Powers 

311. (3) Limited Liability 

312. (4) Legal Entity of Corporation 
313' (5) Permanence 

314. (6) Stock System 

315. (7) Corporate Mechanism 

316. Attractiveness to Investors 

317. Disadvantages of the Corporate Form 



377 



XLIX The Charter 



5318. Definition — S)monyms 

319. Charter Powers — General 

320. (i) To Sue and Be Sued 

321. (2) To Use a Seal 

322. (3) To Buy, Sell, and Hold Property 

323. (4) To Appoint Directors, Officers, and Agents 

324. (5) To Make By-Laws 

325. (6) To Dissolve Itself 

326. (7) To Do All Things Necessary 

327. Charter Powers — Special 

328. Things Ultra Vires 

329. Amendment of Charter 



38s 



XVI 



Chapter 



CONTENTS 



L Incosposation 

1 330. Application for Inoorporatloii 

331. Incorporators 

332. Name of Corporation 

333. Purposes 

334. Capitalization 

335. Shares 

336. Location 

337. Duration 

338. Number of Directors 

339. Classification of Stock 

340. Cumulative Voting 

341. Execution of Certificate 

342. Filing and Recording 

343. De Facto Corporation 

344. Contracts Prior to Incorporation 

LI By-Laws 

§345. Definition 

346. Adoption 

347. Amendment 

348. Enforcement 



Paob 
391 



398 



CONTENTS 

Chapter 

S 374. Vacancies and Removal of Directors 

375. Regular Meetings 

376. Special Meetings 

377. Quorum 

378. OflScers 

379. Salaries 

380. Vacancies and Removal of Officers 

381. Dividends 

382. Bank Deposits 

383. Execution of Contracts 

384. Corporate Seal 



VOLUME II 
Part X — Real and Personal Property 
LV Property Rights 



xvu 
Page 



ll! 



ill 



HI Stock 

$349- 
350- 
351. 
352. 

353- 
354. 
355- 
356. 
357- 
358. 
359. 



401 



Capital Stock 
Stock Certificates 
Capital Stock vs. Capital 
Unissued and Issued Stock 
Full-Paid Stock 
No Par Value Stock 
Common Stock 
Preferred Stock 
Treasury Stock 
Lost Certificates 
How Transferred 



Lin Stockholders and Their Meetings ..... 410 

1 360. Incorporators 

361. What Constitutes a Stockholder 

362. Rights of Stockholders 

363. Powers of Stockholders 

364. Liabilities of Stockholders 

365. Stockholders' Meetings 

366. Quorum 

367. Voting 

368. Voting Trusts 

369. Proxies 



LIV Directors and Opficers 

1 370. Status and Functions of Directors 

371. Number and Authority 

372. Liabilities 

373. Qualifications 



417 



S 385. Origin of Property 

386. Rights to Personal Property 

387. Rights Classified 

LVI Real and Personal Property Distinguished 

S 388. Personal Property Defined 

389. Real Property Defined 

390. Questionable Cases 

391. Fixtures 

LVn Title to Personal Property 

§392. Title 

393. Original Title 

394. Derived Title 

395. Accession 

396. Confusion 

397. Kinds of Ownefship 

LVIII Transfer op Personal Property , * 

5398. Gift 

399' Sale 

400. Chattel Mortgage 

401. Conditional Sales 

LIX Estates in Real Property .... 

§ 402. The Nature of Real Property 

403. Right to Real Property 

404. Estates in Real Property 

405. Remainders and Reversions 

406. Vested and Contingent Remainders 

407. Executory Devises 

408. Time Limit to Effect and Executory Devise 

409. Dower and Curtesy 

410. Homestead 



427 



430 



433 



438 



44a 



xvm 



\>lIArT£A 



CONTENTS 



411. Easements 

412. Joint Tenancies and Tenancies in Common 

413. Trusts 



Page 



4Sa 



454 



LX Title to Real Property 

} 414. Original Title 
415. Acquired Title 

LXI Transfer of Real Property . . . . 

§ 416. Conveyance of Real Property 

417. Warranty Deed 

418. Record of Deeds 

419. Restrictions in Deeds 

420. Searching Title 

421. Mortgage of Real Property 

422. Foreclosure 

423. Kinds of Mortgages 

LXn Landlord and Tenant wj- 

i 424. Lease of Real Property 

425. Parties to a Lease 

426. Rights and Duties of a Landlord 

427. Rights and Duties of a Tenant 

428. Expediency of a Written Agreement 

Part XI— Wills and Inheritance 

LXIII Distribution of Property of an Intestate 

1 429. Definitions 

430. Rules of the Common Law 

431. What Will Become of Real Property 

432. What Will Become of Personal Property 

433. Is It Wise to Make a WiU? 



475 



LXIV How to Make a Will 

S 434. Who Can Make a Will 

435. Restrictions on the Power of Making a Will 

436. General Form for Wills 

437. Kinds of Wills 

438. Executors 

439. Trustees 

440. Trust Estates 

441. Statutes 

442. How to Dispose of Real Property 

443. How to Dispose of Personal Property 

444. The Residuary Clause and Its Vses 

445. What to Do with the Will 

LXV How TO Change or to Revoke a Wm 

§446. How to Change a Will 
447- How to Revoke a Will 



485 



501 



CONTENTS 

Chapter 

LXVI Other Ways of Disposing of Property After 
Death 

§ 448. Deeds of Trust 
449. Gifts in View of Death 

LXVII The Settlement of an Estate 

§ 450. If the Deceased Person Left a Will 

451. If the Deceased Person Did Not Leave a Will 

452. Settlement Without Administrator 

LXVTII Duties of Executors and Administrators 

§ 453- The Procedure of Administration 

454. Inventory 

455. Advertising for Claims 

456. Paying Legacies 

457. Caring for Funds 

458. An Executor's Authority 

LXIX Questions Between Life Tenant and Remainderman 
§ 459. How Conflicting Rights Arise 

LXX Intermediate and Final Accounts .... 

§ 460. The Obligation Account 

461. Kinds of Accounts to be Filed 

462. Final Accounting 

463. Preparing Accounts 

LXXI Rights in Property When There Is no Will 

§ 464. In the Case of Real Property 

465. In the Case of Personal Property 

466. Rights of a Husband or a Wife 

467. What Creditors Must Do 

LXXII Rights in Property Left by Will .... 

§ 468. If Real Property Has Been Devised By Will 

469. If Personal Property Has Been Left By Will 

470. Contesting a Will 

Part XII — ^Personal Relations 

LXXIII Husband and Wife 

§ 471. Persons WTio May Marry 

472. What Constitutes a Marriage 

473. Personal Rights of Husband and Wife 

474. Rights of Husband and Wife in Each Other's 

Property 

475. Rights of Husband or Wife In Case the Other Is 

Injured 

476. Divorce 



XIX 



Page 



504 



506 



512 



S18 



521 



524 



528 



535- 



CONTENTS 



CONTENTS 



XXI 



Chaptek 
LXXIV Parent and Child 

§ 477. Duties and Rights of Father in Relation to Child 

478. Duties and Rights of Mother in Relation to Child 

479. What Duties and Rights May Be Claimed By 

Adopted Children 

480. Children as Criminals 

LXXV Guardian and Ward ....... 

§ 481. Personal Guardian 
482. Guardian of Property 

Part XIII— Suretyship 

LXXVI The Contract OF Suretyship OR OF Guaranty . 
§483. Definition 

484. Nature of Contract 

485. Written Contract 

486. Parties 

487. Consideration 

488. Delivery and Acceptance 

LXXVil Rights of Surety or Guarantor • • • • 

{489. Notice 

490. Defenses 

491. Reimbursement 

492. Subrogation 

493. Contribution 

494. Extension of Time 

495. Discharge 

Part XIV— Debts and Interest 
IXXVin Debts 



Page 
546 



Chapter 

LXXX Interest 



Page 
584 



551 



591 



557 



561 



5 512. Interest 

513. Discount 

514. Usury 

515. Compound Interest 

516. Partial Payments 

Part XV — ^Bankruptcy 
LXXXI Assignment for the Benefit of Creditors 

§517. Introductory 

518. Rights of Debtors 

519. Rights of Creditors 

520. Void Assignments 

521. Rights and Duties of an Assignee 

522. Form of the Assignment 

523. Revocation of Assignment 

524. Insolvency 

LXXXII Bankruptcy Proceedings enS 

§ 525. Receivership 

526. Bankruptcy 

527. Voluntary Bankruptcy 

528. Involuntary Bankruptcy 

529. Persons Who May Bring Bankruptcy Proceedings 

530. Persons Who May Become Involuntary Bankrupts 



I 



S496. Definitions 

497. Evidences of Debt 

498. Open and Stated Accounts 

499. Receipts and Releases 

500. Part Payment in Pull Settlement 

501. Accord and Satisfaction 

502. The Appropriation of Payment 

503. Equitable Jurisdiction m Actions for an 

Accounti2]g 

LXXIX Enforcing Payment of Debts . . . 

§504. When the Creditor Has Some Security for 
the Debt 

505. Where There Is No Security for the Debt 

506. Attempts to Defraud Creditor 

507. The Modem Theory of Credit 

508. Liens 

509. Attachment 

510. Execution 

511. Garnishment 



569 



LXXXIII Bankruptcy Proceedings (Continued) 

§ 531. How Bankruptcy Proceedings Are Instituted 

532. The Referee 

533. Procedure 

534. Creditors 

535- Rights and Duties of Receiver 

536. Rights and Duties of Trustee 

537. Rights and Duties of Bankrupts in Bankruptcy 

Proceedings 

538. Preferred Creditors 



604 



575 



LXXXrV Discharge in Bankruptcy 

§ 539- Discharge of a Bankrupt 



613 



540. What Debts Remain Undischarged 

Part XVI— Bailments and Common Carriers 



LXXXV Bailments 

§ 541. What Is Meant by Bailment 

542. Kinds of Bailment 

543. Mandate and Deposit 

544. Commodatum or Loan 



619 



xxn 



Chapter 



CONTENTS 



§545. Pledge or Pawn 

546. Hiring of a Chattel 

547. Bailment for Custody, Services, or Transport 

548. The Contract of Bailment 

549. Property Rights 

550. Duties of a Bailee 

551. Dissolution of Bailment 



Page 



LXXXVI Common Carriers 



629 



Common Carriers 
The Lien of The Common Carrier 
The Termination of the Bailment 
Interstate Commerce Commission 

556. Bills of Lading 

557. Carriers of Passengers 

558. Telephone and Telegraph Companies 



§552- 
553- 
554- 

555 



Part XVII— -Patents, Trade-Marks, and Cop3rright8 

LXXXVII Patents ......... 

i 559. Constitutional Authority 

560. Introductory 

561. Who May Obtain a Patent 

562. What Inventions are Patentable 

563. What Is Unpatentable 

564. Procedure to Obtain Patent 

565. Procedure in the Patent Office 

566. Interference Proceedings 

567. Final Decision 

568. Government Fees and Grant 

569. Marking a Patented Artide 

570. Design Patents 

571. Foreign Patents 

572. Assignments and Licenses 

573. Joint Inventors 

574. Infringements 

575. Official Publication 

576. Practical Information 

LXXXVIII Trade-Marks 

5577. Description 
• * 578. Common Law Trade-Marks 

579. Essential Elements of a Trade-Mark 

580. What May Not Be Used 

581. WTiat Can Be Used 

582. The Common Law Right 

583. Trade-Marks are Not Assignable Apa.*t from 

Business 

584. Summary 



6$9 



CONTENTS 

Chapter 

LXXXIX Registration or Trade-Marks 

§ 585. The Federal Trade-Mark Law 

586. The Ten- Year Clause 

587. Who May Register a Trade-Mark 

588. Procedure for Registration 

589. What Will Bar a Trade-Mark 

590. Opposition to Registration 

591. Amendments, Rejections, and Appeals 

592. Certificate of Registration 

593. Assignments 

594. Foreign Registration 

XC Trade-Names and Unfair Competition 

§ 595- Unfair Competition Defined 

596. Trade- Names 

597. Secondary Meaning 

598. Personal and Corporate Names 

599. Geographical Names 

600. Imitation of Packages 

601. Other Forms of Unfair Competition 

602. Price Cutting 



XXlll 

Page 
660 



666 



XCI 



Copyrights 

§ 603. Definition 

604. Who May Obtain Copyright 

605. Subject Matter of Copyrights 

606. The First Step 

607. Subsequent Ptocedure 

608. Making Out the Application for Copjrright 

609. The Affidavit 

610. The Fees 

611. The Books Deposited 

612. Time for Filing Copyright 

613. Renewals 

614. British Copyright 



Part XVIII— Taxation 



075 



i9^ 



XCII Laying Taxes 

S 615. Who Has the Right to Lay Taxes 

616. Purposes for Which Tax May Be Laid 

617. Methods of Taxation 

618. Extent to Which Persons May Be Taxed 



687 



XCIII Collecting Taxes .... 

§ 619. Assessment of Real Property 

620. Assessment of Personal Property 

621. Payment of Taxes 

622. Taxation of Corporations 

623. The Federal Income Tax 



^3 



CONTENTS 



Pittt XIX— Arbitration 
Chapter 

XCrV Arbitration and Law 



§634. 
625. 
626. 
627. 
628. 
629. 
630. 
631. 
632. 



Advantages of Arbitration 
Objections to Arbitration 
Statutory Arbitration 
Agreement for Arbitration 
Withdrawal from Arbitration 
Hearings 

Signing the Award 
Enforcing the Award 
Setting Aside the Award 



Page 
701 



Part XX — Law and Lawyers 

XCV Study of Law for Business Men 

1 633- Law Books for Study 

634. Law Books for a Busy Man 

635. The Case Method of Legal Study 

636. Taking a Law Course 

637. Courses in Commercial Law 



CONTENTS 

Chapter 

XCIX Evidencing an Instrument .,,... 
Form 

2. Agent's Signature 

3. Corporate Signatures to Letters 

4. Corporate Signature 

5. Testimonium Clause — Two Corporate Signatures 

6. Testimonium Clause— Corporate and Individual Sig- 

natures 
7- Attestation Clause 

8. Attestation Clause in a Will 

9. Acknowledgment of Individual Person 

10. Acknowledgment of Attorney 

11. Clerk's Authentication 

12. Affidavit 



Page 

744 



711 



XCVI Choosing a Lawyer 



638. The Legal Profession 

639. The Domination of Precedent 

640. The Conservatism of the Law 

641. Ethical Standards of the Bar 

642. The Criminal Lawyer 

643. Selecting a Lawyer 

644. Lawyers' Compensation 



716 



XCVII Law as a Vocation 



C Contract Forms 

Form 

13. Simple Contract 

14. Contract by Letters 

15. Unilateral Contract 

16. Formal Contract 

17. Corporate Contract 

18. Assignment of Contract 

19. Assignment of Contract— Indorsement Form 

CI Forms op Sales Contracts . . ; ; 
Form 

Memorandum of Sale 
Contract of Sale by Letters 
Conditional Sales Contract 
Bill of Sale— Personal 
Bill of Sale— Personal 
Contract of Warranty 



757 



762 



20. 
21. 
22. 

23. 
24. 

25. 



( 645. Necessity of the Work of a Lawyer 

646. The Work of the Family Lawyer 

647. Business and PubUc Life 

648. The EflFect of Legal Training 

649. The Dignity of the Profession 

650. Law as a Practical Vocation 

651. Succeeding in the Law 

652. Deceptive Statistics 

653. Practical Directions 



Part XXI— Forms 



736 



XCVIII Drafting a Contract 

Form 
I. The Contract as Drafted 



739 



Cn Agency Forms .... 

Form 

26. Appointment of Special Agent 

27. Appointment of General Agent 

28. Power of Attorney 

29. Power of Attorney — Corporate 

30. Revocation of Power of Attorney 

31. Proxy — Simple Form 

32. Proxy— Unlimited 

33. Revocation of Proxy 

CIII Forms of Negotiable Instruments 
Form 

34. Check by Individual • 

35. Corporate Check 

36. Corporate Indorsement of Check 

37. Voucher Check 

38. Note by Individual 

39. Corporate Note— by President 



767 



773 






XXVI 



Chaftei 



CONTENTS 



CONTENTS 



I 

i 






Ponii 

40. Corporate Note— By Treasurer 

41. Corporate Note— Collateral Security 

42. Sight Draft ' 

43. Bank Acceptance 

44. Trade Acceptance 
45' Certificate of Protett 

CIV Forms of Employment Contiacts 

Form ' * 

46. Contract of Employment — Simple Form 

47. Contract of Employment 

48. Contract of Employment by Letters 

49- Contract of Employment with Share in Profite 

CV Partneeship Forms . 

Pomi 

50. Simple Articles of Partnership 

51. Articles of Copartnership 

52. Sundry Partnership Clauses 

CVI Corporate Organization Forms 
Form 

53. Subscription list 

54. Stock Certificate— Common Stock 

55. Assignment of Stock Certificate 

56. Certificate of Incorporation — New York 

57. By-Laws— Simple Form 

CVII Forms for Corporate Meetings . 
Form 

58. Call and Waiver for Special Meeting of Oirettors 

59. Agreement to Consent Meeting of Directors 

60. Notice of Special Meeting of Directors 

61. Minutes of Special Meeting of Stockholders 

62. Minutes of Regular Meeting of Directors 

63. Motions 

64. Directors' Resolutions 

65. Certified Resolution Designating Bank 

CVin Miscellaneous Corporate Forms 
orm 

66. Resignation of Director— Tentative 

67. Resignation of Director— Peremptory 

68. Report of Committee on By-Laws 

69. Treasurer's Affidavit— Cdrporate Statement 

CIX Real and Personal Property Forms 
Form 
7a Chattel Mortgagt 

71. Lease 

72. Deed With Full Covenant! 

73. Real Estate Mortgage 



Pagb 



Chapter 

CX Sundry Forms 



7<t 



7«4 



Form 

74. General Release 

75. Will 

76. Bill of Lading 

77. Guaranty Contract 

78. Guaranty Contract by Letter 

79. Agreement for Arbitration 



Appendix 

Appendix A— Chart Showing Jurisdiction of State Courts 
B— A Professional Law Library .... 
C— Glossary 



xxvu 

Page 
811 



821 
822 
826 



7M 



797 



804 



807 






BUSINESS LAW 



PART I 



THE LAW OF THE LAND 



CHAPTER I 



EVOLUTION OF LAW 



§1. Definition 

The English word "law" has a variety of meanings. We 
talk loosely of the law of gravitation, civil law, common law, 
written law, ecclesiastical law, the laws of health, the laws of 
God, etc., etc. For the sake of clearness it is necessary in this 
book to limit the word to those rules of action and conduct 
which regulate our relations with our fellow men. 

The legal definition of law is "a rule of action prescribed 
by the supreme authority," and to that is usually added, "com- 
manding that which is right and prohibiting that which is 
wrong." This last part of the definition must always be quali- 
fied by the explanation that the words "right" and "wrong" 
in this connection are to be construed as legally right and 
legally wrong. At times what is legally right may be morally 
wrong, and at other times what is legally wrong may be 
morally right. 

§ a. The Origin of Law 

It is impossible to Imagine any state of society without 
some law, that is, some "rule of action." A solitary man in an 
uninhabited country might be said to be without law, but as 
soon as one other human being came into any relation with 
him, certain rules and customs would grow up to regulate their 
mutual rights, and these would soon have the form and the 
force of law. Children in their, play have rules and customs 
to govern their actions. Among the students of every college 

3 



V 



I 



4 THE LAW OF THE LAND 

there is a curiously complex system of rules and customs 
rigidly enforced, which defines the rights and the duties of the 
different classmen and their relations to others in the college. 

A simple people living in a sparsely settled country could 
get along with a minimum of law, but a highly or^nized 
people living in a densely populated country require many 
laws. Strangers used to comment on the number of "Es ist 
yerboten" signs in Germany, but a complicated system of law 
IS the necessary consequence of a dense population and a 
highly organized social structure. 

§ 3- Law and Liberty 

Laws are a necessary evil incident to social existence. The 
lone man in a wilderness has complete liberty. As others join 
him, laws and established rules become necessary. Every law 
and every rule subtracts from the individual's previous liberty 
of action and circumscribes his freedom. On the other hand, 
the advantages of social life and achievement are great; there- 
fore the majority of mankind are wUling to pay the price, 
which Is submission to law. The trouble comes from the 
fractious few who, while they enjoy the advantages of living 
in a civilized community, are not willing to pay the price, and 
who seek to evade the laws which are obeyed by others and 
which alone make the civilized community possible. 

§ 4. Sources of Law 

The beginnings of our legal system go back to the early 
history of our country when the colonists from England first 
established courts, and decided the cases that came up accord- 
ing to the principles of the law of England as it existed at 
that time-that is, they utilized as much as was applicable to 
conditions prevailing in the colonies. This law was prin- 
cipally the famous "common law" of England that had grown 
up through centuries. Its provisions were of great advantage 



EVOLUTION OF LAW S 

to the colonists when the rights conferred by common law 
were infringed by the arbitrary acts of the home government. 

They were able to show that the rights they claimed were 
conferred by the common law, and that the king and the 
parHament were seeking to deprive them of the common 
birthright of Englishmen.^ 

Colonial Charters. Most of the colonies had been estab- 
lished under charters — instruments which served as our writ- 
ten constitutions do now. Connecticut and Rhode Island 
continued to use colonial charters as substitutes for constitu- 
tions even after the Revolution. To the common law were 
added the enactments of the colonial legislatures that had been 
established in each colony. The power of these colonial legis- 
latures was limited by the provisions of the charter under 
which the particular colony existed. 

Effect of the Articles of Confederation. At the time of 
the Revolution the colonies adopted the Articles of Confedera- 
tion, which left each separate colony to establish such govern- 
ment as it saw fit. The authority of these governments was 
expressed usually in a constitution which took the place of 
the old charter and in legislative enactments passed to sup- 
plement the constitution and to apply general principles to 
particular cases. 

The Federal Constitution. Later, when the Federal Con- 
stitution was adopted, its authority became supreme, and as 
each colony joined the new nation the local governments were 
shaped according to the basic principles of the Federal Con- 
stitution. The common law, the state constitutions and 
charters, and the enactments of state legislatures, all gave way 
on any point that conflicted with the Federal Constitution. 
This subject is treated more fully in the two succeeding 
chapters. 

>CooIey*s Constitutional Limitations, Chapter III. 



THE LAW OF THE LAND 



Review Questions 



I. 

2. 



Give the legal definition of "the law/' 

What do you understand by "the supreme authority" in the 
definition? 

3. Mention some action legally right but morally wrong. 

4. How far is the law a guide to what is morally right? 

5. Can you make men moral by law? 

6. What is the origin of law? 

7. What is the origin of the laws regulating the operation of auto- 

mobiles? How far do they date back? 

8. If a body of men were wrecked on an uninhabited island would 

they be subject to any law? What would probably happen? 

9. Why are we willing to submit to law and lose our freedom to do 

as we choose? 
ID. What would be the condition ot a community without any law? 
II. What are the sources of the law in this country? Outline them 

in order of time. Outline them in order of authority. 



f 



t 



CHAPTER II 

THE WRITTEN LAW 

§ 5. Definition 

The technical term "written law" means law that is em- 
bodied in constitutions, acts of Congress, of state legislatures, 
and of other bodies with legislative authority. In many coun- 
tries all the governing law is this so-ca' -^d "written law." 
Napoleon, who had a better title to fame in the code of laws 
to which his name is attached than in all his conquests, called 
together the persons most learned in law to reduce into one 
orderly, compact body all the varying laws at that time pre- 
vailing in France. The "Code Napoleon" which was the result 
has from that time to the present day been the major law of 
France and is what we call "written law." No similar codifi- 
cation of all existing laws has ever been attempted in the 
United States, and our so-called "written law" is only a part 
of the body of law by which we are governed. 

§6. Constitutional Government 

Nevertheless in our country the written constitution is the 
basis of all law. This is true of the United States as a whole 
and also of each separate state. A written constitution is the 
fundamental law on which all other laws are based and to 
which they are all subject. A constitution has been explained 
as that written instrument which defines the powers of govern- 
ment and limits the exercise of those powers for the protection 
of individual rights. The power of Congress is derived from 
the Constitution of the United States. Each state legislature 
has only the power granted by the state constitution. "Con- 

7 



r 



I 

I 



8 



THE LAW OF THE LAND 



gress can pass no laws but such as the Constitution authorizes 
expressly or by clear implication." 

§ 7. The United States Constitution 

The Constitution of the United States is the highest au- 
thority in the United States. Next in rank come laws enacted 
by Congress in pursuance of the powers enumerated in the 
Constitution. For example, Congress has power to regulate 
commerce with foreign nations and among the several states, 
and under this authority it has passed the "Anti-Trust Law." 
On the other hand, the Constitution does not grant Congress 
any legislative power in regard to marriage and divorce, and 
for this reason Congress is not authorized to enact a federal 
law regulating divorces, however desirable such a uniform law 
might be. Under the present Constitution this matter is left 
to the discretion of the separate states, and divorce laws 
change as state lines are crossed. 

At the time of the adoption of the Federal Constitution 
the representatives of the separate states were every whit as 
jealous of the rights of the states as we as a nation were 
jealous of the rights of the United States in the matter of the 
League of Nations. They clung to the sovereign rights of 
states and feared, worse than men ever feared war and 
pestilence, the sinking of the state in the nation. There is an 
extremely interesting parallelism between the arguments ad- 
vanced against the adoption of the National Constitution by 
the states and those advanced against the adoption of the inter- 
national constitution by the nation. The National Constitution 
as adopted was a compromise whose makers held that the 
powers of the United States as a nation were to be limited, so 
as to leave to the separate states the maximum of sovereignty. 
Their purpose in drafting the Constitution was to define these 
limits to national supremacy with exactitude and carefully to 
mark out the powers of Congress beyond which it could not 



THE WRITTEN LAW 9 

go. Fortunately, grants of power as expressed in the Con- 
stitution were couched in general language, and in interpreting 
their meaning the Supreme Court of the United States has, 
in many instances, placed a liberal construction upon them, 
so that Congress today is a far more powerful body than it 
otherwise would have been. For example, at the time the 
Constitution was adopted no one dreamed of the enormous 
power granted to Congress in the right "to regulate commerce 
between the states." The commerce between the states at the 
time the Constitution was adopted was of little significance 
and the power to regulate was of small moment. With the 
vast extension of our interstate commerce, however, the con- 
gressional power of regulation has grown to tremendous pro- 
portions. The recent decision of the Court in regard to the 
constitutionality of the Adamson railroad wage law would 
seem to extend this power almost without limit. The great 
war necessitated federal control of the railroads. Even though 
the roads are returned to their corporate owners, it is likely 
that there will be an increased supervision by the central gov- 
ernment that will vastly and permanently expand the authority 
of the Federal Government. 

The wonderful thing about the Constitution of the United 
States is that though it was devised over a century and a 
quarter ago, and though the changes in our country and in its 
modes of life, in its social relations, and in its methods of 
business have been tremendous, the old Constitution, with but 
few changes, still serves as the fundamental law of the land 
and chafes in but few places. Well did Bryce in his "American 
Commonwealth" say of it: 

The Constitution of 1789 .... after all deductions 
.... ranks above every other written constitution for the 
intrinsic excellence of its scheme, its adaptation to the cir- 
cumstances of the people, the simplicity, brevity, and preci- 
sion of its language, its judicious mixture of definiteness in 
principle with elasticity in detail. 



lO 



THE LAW OF THE LAND 



THE WRITTEN LAW 



II 






S 8. Laws of Congress 

The legislative power of Congress is limited to specific 

tTto^^ZT "^ *' ''°"^*""^'°"- Congress hTs" 
power to regulate commerce with foreign nations and among 

Ae several states, and with the Indian tribes." but hTno 
S which" ""^.'""^ ''^'^•^"^ ' '^''^^y - -y J^ind 7f 
other hand Congress is authorized to "coin money reflate 

t:^u:'^r' "'^ °» 't^ '"'"• -'^ «^ *^ SnS « 

Sp^^^nr'^r '.'^•^ P°*^'- ^^" "^ « system of 

entire country. If ever we adopt the metric system it will be 

of^tr "'°° °' ''*'"^"^' "^'^ '^•^ consdtutionallll^ 

Whenever Congress acts under a constitutional grant of 
power. Ae states are excluded from legislation on that subject 
For instance Conpess has power to pass "uniform law on 
the subject of bankruptcy." and when the present bankrupt^ 
law was passed m 1898 it at once nuUified all the existing sUte 
laws on the subject of insolvency. Laws passed by Cong el 
*n pursuance of its constitutional powers are superior to state 
constitutions and state laws. 

§9> State Constitutioiis 

At the time of the adoption of the National Constitution 
each of the thirteen original states was exercising the powers 
of government under some form of written constitution 
These instruments remained in effect, except in those particu- 
lars which were overniled by the Constitution of the United 
Mates The newer states have adopted constitutions, and be- 
fore the states were admitted it was necessary for Congress 
to accept the proposed constitutions But within the limits of 
each particular state the state constitution is supreme The 



state legislature cannot enact a law which goes counter to any 
of the provisions of the state constitution. 

§ 10. Constitutional Amendments 

It was intended by those who framed our system of gov- 
ernment that amendment of the Constitution of the United 
States should be both difficult and slow. They did not intend 
that a majority of the voters should at any time amend the 
Constitution. They did not have such entire confidence in the 
wisdom of the common people as to be willing to empower a 
bare majority of the voters to set aside the constitutional 
provisions they had so carefully devised. So they provided 
that no amendment should be valid as a part of the Constitu- 
tion unless it were first proposed by two-thirds of both Houses 
of Congress and afterwards ratified by three-fourths of the 
several states. As it was purposely made difficult to amend 
the United States Constitution, so most of the states have 
likewise made it more or less difficult to amend or to change 
their constitutions. In some states a convention for the special 
purpose of revising the constitution is called at stated periods ; 
others leave to the legislature the calling of the conventions, 
while the usual plan is for the legislature to submit separate 
amendments to the people from time to time. 

§ IX. Constitutions That Legislate 

Constitutions are intended to be permanent, and therefore 
should lay down only broad principles. They should not be 
encumbered with legislation on any subject on which the policy 
or the best interests of the people are likely to change. The 
pressure for change has been quite as strong as the framers 
of the constitution foresaw. 

At the present time many persons desiring to introduce 
reforms and to secure liberal legislation fret at the delays and 
the difficulties of overcoming constitutional impediments, and 



I2 



THE LAW OF THE LAND 






h«^ce advocate making our constitutions, both federal and 

vl;r'T. '"'"'r"' ^"' '^" ^^^^""^t'- - their pro 
visions. There is such a distrust today, moreover of the 

:^Z:' '^'^^'^'T *^* •" '"^"^ '' *^ newer sLe con! 
SnTft fril^r- \'"'" T''"''''^ *^^ ^''-'^ have 
o^ OkLL ^ T^ f "°"- ^°' "^^""P'^' *^ Constitution 
of Oklahoma provides that eight hours shall constitute a day's 

work throughout the state; that railways shaU not cha'ge 
passengers more than two cents per mile, while the corporation 
commission may exempt any railway in case its earnLgs are 
so low as to justify a higher rate; that railways shall have 
adequate, comfortable, and clean stations, etc By incor! 
porating sud, detailed legislation in a state constitution, its 
function, which ,s to provide fundamental and basic law is 
confused with that of the legislature, which is to provide laws 

§ la. Legislative Enactments 

mJ^.T 1^ ^'^'^ ^""^ ^"*°"*y *° *^ st^te constitutions 
come the laws or acts of the separate state legislatures so far as 
A^ conform to the Constitution of the United States and the 
constitution of the particular state. These are known as 
statutes and are of authority in the state where they are en- 

1ft ? r M^" '" ^'^'^ '""'' *^ ordinances or laws 

^fi^^il °i /"""" ^""^ '^°'™"°" '=°""^i's 'n towns and 
ernes. The law from all of these different sources-constitu- 

Tl^7 ? ^"^''''' ''"^ "^ legislatures, and ordinances 
of mun cipal governments-may be said to make up the body 
of what IS called the "written law." in contradistinction to 

rifcTaVer "" ''"" "''* '^ "'^""''^ '" the 



THE WRITTEN LAW 



13 



§13. Statute Law 

The term "statute law" or "statutory law" is frequently 
used in contradistinction to the common law. In its general 
use it means all law expressed in constitutions, codes and en- 
actments of the legislature, and is identical with the term 
"written law" as used herein. In a narrower sense it means 
the legislative enactments of the states or of the United States, 
which are published in volumes of statutes, or revised statutes, 
as "The Revised Statutes of the State of New York." In such 
a work will be found all the laws regulating the conduct and 
activities of the citizens and others in the state. 

The common law gives way whenever it comes in conflict 
with the statute law. The legislature in each state has au- 
thority to supersede, extend or abrogate the common law. 
The common law is the old law that prevails until it is over- 
ruled by statutes of the United States or of a state legislature. 



§ 14. Subsidiary Laws 

In late years there has come into existence an immense 
additional body of written law consisting of the rules and 
regulations issued by boards of health, building boards, school 
authorities, and various bureaus and commissions. For in- 
stance, the Interstate Commerce Commission is empowered by 
Congress to regulate particular matters concerning the rail- 
roads. In most of the states there are railroad commissions 
with similar authority to regulate traffic within state boun- 
daries. Moreover, the different transportation companies and 
the other corporations operating public utilities have the right 
to make reasonable regulations for the government of those 
using their facilities. Thus, in tlie aggregate, the "written" 
or "statutory" law comprises a vast number of legal and 
semi-legal enactments, from articles of tlffe Constitution down 
to the rules of the trustees of the smallest school district. 



14 



THE LAW OF THE LAND 

Review Questions 



1. What is written law? 

2. What is a constitutional government? 

3. Does a constitution have to be written ? 

4. What is meant by a government of limited powers? 

5. What is the highest source of law in the United States? 

7. Why cannot Congress give us a system of uniform divorce laws > 

a Has Congress the right to debar from interstate commeT'; 

articles made by child labor? Give reason for your answer 

Why has It been made difficult to amend our constitution ? ' 

What IS the difference between matters that should be embodied 

m a constitution and matters that are properly subject to 

legislative action? f f J !.uujeci to 

Name in order of authority and dignity the sources of "written 

Why has New York State a constitution, while New York Citv 

has not? ^ 

13. Name some congressional laws passed within recent years 

14. What laws are superior to a state constitution ? 

IS Name some laws passed by the legislature of your state within 
recent years. 



9. 
10. 



II. 



12. 



CHAPTER III 



THE UNWRITTEN LAW 



§ 15. Definition 

To the layman, perhaps, the term "unwritten law" is some- 
what misleading. It is called unwritten law because there was 
a time when it was not written. As soon as men commenced 
to live in com.munities they found it necessary to conduct their 
intercourse and dealings according to rules, and these customs 
or uniform methods of doing things are supposed to be the 
foundation of what is now called the "common" or "unwritten 
law." For instance, when vehicles meet it is the custom in this 
country to turn to the right. This custom is not the enactment 
of any legislature, and yet it is practically a law, for if anyone 
driving a vehicle failed to observe it he would be liable for any 
damage that resulted. It might be possible to find cases where 
this particular matter had come up and received the ratification 
of a court decision, but in such cases the court did not make 
either the custom or the law; it merely recognized that the 
custom was general and hence had the force of law. That is, 
the court recognizes the custom as law, because men have acted 
in one way until that way has become a rule of action; the 
court is bound by it although there is no written record. When 
so recognized by a court, it would be placed upon the court 
records and so would actually be written down, yet it is still 
called "unwritten law" because it is based on the earlier un- 
written custom instead of upon legislative enactment. Lawyers 
distinguish these classes by the Latin terms lex scripta — 
written law — and lex non scripta — unwritten law. 

IS 



1 6 



THE LAW OF THE LAND 



§ i6. The Doctrine of Precedents 

The courts do more than record customs ; they create law 
by decisions that then become precedents. In primitive days 
when men had differences of opinion they would get someone 
older and supposedly wiser than the rest, to arbitrate or decide 
the matter. When a given matter had once been decided in 
a certain way, the inhabitants of the country would shape their 
conduct according to this decision; it would be a precedent 
for future action and future decisions and in this way would 
become part of the unwritten law. Gradually, as civilization 
increased and these precedents accumulated, a "body" of un- 
written law grew up, founded partly on customs and partly 
on precedents established by the courts. 

Moreover, if a question came before one of these early 
courts and no custom could be found on which to base the 
decision and no precedent to guide it, the judge would decide 
according to his ideas of right and justice and thus would add 
a new item to the sum of this unwritten law, which in turn 
would become a precedent for later cases like it. England has 
been eulogized by its poet laureate as: 

A land of settled government, 
A land of old and fair renown. 
Where Freedom broadens slowly down, 
From precedent to precedent. 

§17. Court Reports 

In the old days when writing was a rare accomplishment, 
individual lawyers used to make their own notes of cases in 
what were called "Common-Place Books," which they would 
use as authorities when similar cases were tried. In this way 
there grew up the custom of making court reports. Today 
the decisions of the courts are most carefully recorded and 
published, and the court reports are the greatest repositories 
of this so-called "unwritten law." 



THE UNWRITTEN LAW 



17 



§ 18. The Volumes of Reports 

The difficulty in our country at the present time is that 
we have over forty-eight different and independent systems of 
courts, all grinding out decisions, which are recorded and 
published in long rows of volumes. In the first place the 
number of reports has become so great that it is impossible 
for even the most industrious lawyer to keep up with them. 
The existing law reports of this country fill thousands of 
volumes, and every year they are growing in number and 
complexity. In the second place, there are forty-eight separate 
jurisdictions, the decisions do not always harmonize, and then 
occurs a conflict of laws. 

Lawyers depend on large law libraries to which they have 
access, kept up usually on a co-operative basis. Meanwhile, 
they subscribe for volumes of digests and use encyclopedias of 
law to guide them in their searches through this ever-increas- 
ing maze of judicial decisions. In each state the decisions of 
the highest state courts are paramount, and the lawyers in the 
state try to familiarize themselves with at least the trend of 
these decisions. 

Whenever political, economic, and social conditions change 
so radically that the decisions of the higher courts become 
unjust or restrict legitimate activity too much, the state legisla- 
ture interferes and enacts laws that supersede the judicial 
decisions. In other words, the written law prescribed by 
the legislature overrules the unwritten law that comes from 
the decisions of the court. 

§ 19. Citations 

When a lawyer wishes to use a case in argument, he cites 
it by naming the parties, the number and name of the report, 
and the page on which the case is found. Only by practice 
can a person know, when a case reference is given, what court 



i8 



THE LAW OF THE LAND 



decision the author cites. It is no small part of a lawyer's 
training to know where to find the decision he wants. This 
matter of finding cited cases is explained in Appendix B. 

§20. The Common Ltaw 

The unwritten law was also called, as has been said, the 
"common law," and old-school lawyers were fond of extolling 
it as the perfection of human wisdom. When this country 
broke away from England at the time of the Revolution we 
retained the English common law, and it became the founda- 
tion of the general system of law prevailing throughout most 
of this country. In Louisiana, however, and to a certain ex- 
tent in Texas and California, the so-called Roman or "civil 
law" was introduced and became largely the foundation for 
the systems of law in those states. This system based on the 
old Roman law, prevails in Italy, France, and other Latin 
countries in Europe and is utilized by the Teutonic peoples as 
well. The EngHsh law is indebted to the Roman system more 
than English common law advocates are willing to admit, and 
it might have been better had more been borrowed. 

The original English common law was a harsh and bar- 
barous code, having little or no consideration for the rights 
of women and children and making man the tyrant of the 
family. Any infractions of its provisions were punished with 
drastic penalties. The smallest theft by man, woman, or child, 
was punished by death. At the present time most of the 
harsher features of the common law have been eliminated. 
Juries refused to convict prisoners on account of the cruel 
penalties, and the law has been modified by numberless legisla- 
tive enactments and expanded by judicial construction, to fit 
a more civilized and cultivated society than that in which it 
originated. 

It is evident that the term "unwritten law" covers a wider 
field than "common law." Therefore it is used in this work 



THE UNWRITTEN LAW 



19 



to designate the law that is contained in the reports of the 
courts. 

§21. Law-Merchant and Commercial Law 

The law-merchant was originally a part of the general 
law of nations, being concerned with bills of exchange and 
the like, freights, average, demurrage, insurance, bottomry and 
other matters of the same nature pertaining to commerce. 

Chancellor Kent in his commentaries says that the law- 
merchant "consists of certain principles of equity and usages 
of trade, which general convenience and a common sense of 
justice had established to regulate the dealings of merchants 
and mariners in all the commercial countries of the civilized 
world." 

Blackstone refers to it as "The particular system of cus- 
toms used only among one set of the king's subjects, called 
the custom of merchants, or lex mercatoria: which, however 
diflFerent from the general rules of the common law, is yet 
ingrafted into it, and made a part of it; being allowed, for 
the benefit of trade, to be of the utmost validity in all com- 
mercial transactions." 

While the law-merchant had its origin in international 
usage, as a matter of fact it was incorporated into and made 
a part of the body of the common law of England and was with 
it transplanted to this country and made a part of our own com- 
mon law so far as it was applicable to our conditions. In later 
years it has been largely extended and modified by statute but 
still remains part of our unwritten law and as such governs 
in the present course of trade and business. 

The term law-merchant is generally applied to the old laws 
or customs of merchants. The corresponding modem term 
is commercial law, which is defined as the body of principles 
and rules, drawn chiefly from the customs of merchants, by 
which the rights and obligations arising in commercial transac- 



Ir ' 



20 



THE LAW OF THE LAND 



tions are determined. It is also defined simply as the law 
applicable to commercial transactions. 

§ aa. Unconstitutional Laws 

It frequently happens that a legislative enactment designed 
to overrule some objectionable decision of the courts comes 
into conflict with a provision of the state constitution or of the 
United States Constitution and the courts may decide this new 
law to be unconstitutional. If the people in the state should 
still desire to maintain the legislative enactment, they would 
have to amend the state constitution except in states, Colorado 
for example, whdse constitution provides for the 'Recall of 
judicial decisions" by the vote of the people. So far as the 
writer knows, however, this power has never been invoked, 
and indeed it seems a dangerous right since popular passion 
might easily be swayed to commit on occasion, in this way, 
great injustice. In case the law were in conflict with the 
Constitution of the United States, the people must either 
submit or else undertake the very arduous task of stirring up 
all the people in the country to amend the Federal Con- 
stitution. 

A notable instance of this is the income tax law, which 
was passed by Congress but declared unconstitutional by the 
Supreme Court. Then the Constitution was amended, where- 
upon Congress passed the present income tax law which, with 
its amendments, will doubtless be a permanent feature of our 
system of taxation. 

§33. The Recall of Judges 

Within the last few years many persons have become im- 
patient with the slow process of changing the Constitution 
This has led them to advocate, as a short cut to securing better 
laws, the recall, that is, the dismissal, of any judges who decide 
that popular laws are unconstitutional. If this law went into 



THE UNWRITTEN LAW 



21 



effect any judge who rendered decisions opposed by the major- 
ity of the voters could be recalled and a more subservient 
arbitrator elected. For several reasons such a procedure seems 
unwise. It would be better to facilitate the process of amend- 
ing the Constitution than to seek judges who will disregard 
the plain letter of existing law and will support, as legal, laws 
that plainly are not in harmony with the provisions of the 
Constitution. But this is too large a subject for treatment 
here. 



Review Questions 

1. Give some examples of custom-made law. 

2. When a custom is recognized by a court and its decision is 

recorded, what is the effect? 

3. What is the argument for observing precedents? 

4. What is the disadvantage of our numerous volumes of reports? 

5. In what cases do legislative enactments supersede court deci- 

sions ? 

6. Give the arguments for and against the recall of judges, 

7. What is the relation between the common law and statute law? 

8. Where do we get our common law? 

9. What countries have laws most nearly like ours? 



CHAPTER IV 

LAW AND EQUITY 

§24. Remedial Law 

When anyone has suffered wrong and his legal rights have 
been infringed, he seeks a remedy. Jhe law itself may be 
ideal, but if the machinery to enforce the rights defined by 
the law be defective, abstract perfection will avail but little. 
Therefore a study of what is called remedial law is necessary 
before we can tell what real help we are likely to obtain from 
the law. The "law's delay*' is proverbial. In all matters of 
judicial procedure there has always been a tendency to formal- 
ity and "red tape." Too often this tendency becomes so ex- 
cessive that it nullifies the remedy and results in a denial of 
justice. The remedy may be so costly and long deferred that 
it were better left unsought. The man with limited means is 
too often, on this account, barred from seeking justice. 

Suits or actions to redress wrongs or to enforce rights are 
classified as suits at law and suits in equity. It is not easy to 
explain briefly the distinction between the terms "law" and 
"equity" as they are used in our administration of justice. 
The two words are used in this connection without any refer- 
ence to the ordinary meaning attached to them. A real, 
technical distinction exists between a case at law and a case 
in equity which a lawyer must thoroughly understand. 
Whether it would pay a business man to study out the exact 
and full distinction between the two is doubtful. But, as it is 
impossible for a lawyer to avoid using the terms in their 
technical sense, it is important that the layman should have 
a general idea of what the lawyer means, so that the plain 

22 



LAW AND EQUITY 



23 



man may not be misled by confusing the ordinary English use 
of the words with the legal signification. 

§ 25. Equity in the Legal Sense 

In England many years ago the proceedings at law had 
become so cumbersome and so limited in scope that it was 
difficult to obtain justice in the courts of common law. King 
Henry VII then provided that in those cases in which the 
common law did not afford a remedy, relief could be obtained 
by applying directly to his chancellor. This official, who was 
also a dignitary of the church, favored the Roman or civil 
law and adopted a procedure founded on that law in contra- 
distinction to the common law. Such a procedure before the 
chancellor was called a suit in "chancery*' or "equity," as dis- 
tinguished from the procedure "at common law" or simply 
"at law." It should be noted, however, that while at first it 
was simpler to bring a suit in equity than at law, this dis- 
tinction soon vanished and equity proceedings became even 
more complex and technical than the procedure at law. The 
chancellor, however, gave relief in many cases for which the 
common law gave no remedy. The common law was adapted 
to a simple life and a crude social system. As the English 
people advanced the deficiencies of the common law were 
manifest and the introduction of the courts of equity was a 
long step in legal reform. The two distinct systems both con- 
tinued; the procedure was different, the rules were different, 
and the relief given was different. The lawyers who practiced 
before the chancellor were called solicitors; the lawyers who 
appeared in the common law courts were counselors or 
barristers. 

In equity the remedies are different from those provided 
by a suit at law. To illustrate the difference, if anyone breaks 
down your fences and makes a road across your property, at 
law you can sue only for damages; in equity you can ask an 



M 



24 



THE LAW OF THE LAND 



LAW AND EQUITY 



25 



injunction restraining the offender from further trespass, and 
also recover for any damage he may have done. 

§ a6. Suits at Law and in Equity 

The distinction between law and equity was brought to this 
country and as a result there are in all the states the two 
divisions of the work of the courts and the two methods of 
bringing suit. In a few states the law and the equity courts 
are kept entirely separate, as is the case in New Jersey ; and 
in these states the public realizes more readily the real dif- 
ference between law and equity administration. But in most 
states today, the actions are brought in the same courts, the 
only differences being in the preliminary procedure, in the 
remedies which the courts grant, and in the fact that in most 
cases at law there is a jury trial, while in equity cases a judge 
or judges alone hear the case. 

A court of law hears both civil and criminal cases. Civil 
cases are the ordinary suits about contracts and property rights 
and are brought by private parties against other private parties. 
Criminal cases are suits brought by the state itself against 
those who are accused of having broken the law, and who 
are punishable by fine or imprisonment. In such a case the 
fine goes to the state. (See Chapter V.) 

A court of equity hears only civil cases. If a person is 
interfering with another's rights, a court of equity will grant 
an injunction forbidding him to do so in the future, and will 
at the same time make him pay damages to the injured party 
for the wrong which has already been done. 

§27. Bringing a Suit at Law 

When A refuses to pay a debt that is due, or fails to do 
what he has contracted to do, or by his negligence or wrong- 
doing has caused damage to B, if B wishes to bring suit against 
A he employs a lawyer who prepares a written statement 




».. 






setting forth his client's cause of action. This paper is called 
a complaint and must be served upon A. At the same time 
with or before the service of the complaint, B must serve a 
notice or summons on A requiring him to answer within a 
certain number of days. If A does not appear, the court will 
consider that A does not mean to defend and, in some in- 
stances, if the claim is definite, it will grant a judgment by 
default against A and in favor of B, without a trial or any- 
thing more than a sworn complaint to prove the case. 

Service of a summons must be made personally upon a 
defendant except: 

1. Where the person is an infant, it may be delivered 

to a parent or guardian. 

2. Where the person is adjudged insane or incompetent 

to manage his own affairs, it may be delivered to 
a guardian or to the defendant. 

3. Where a person, firm, or corporation is without the 

state, simimons may be served by publication of 
the summons in two newspapers, most likely to be 
seen by the defendant, for a specified time of not 
less than once a week for six successive weeks. 
(The details given are for publication in New 
York. They vary in the different states.) 

The party bringing the action is called the "plaintiff," or 
in some states the "complainant." The party against whom 
the action is brought is called the "defendant." If the de- 
fendant does not wish to allow judgment to go against him by 
default, he or his lawyer must within the time set serve an 
answer to the other party's complaint against him. In this 
paper the defendant usually brings forward any cause of action 
which he may have against the other party. This is called a 
counterclaim. The written papers by which the parties bring 
their cause before the court are called "pleadings." If the 






96 



THE LAW OF THE LAND 



defendant denies the facts alleged or sets up a counterclaim, 
the pleading is called an answer. 

The other party then replies to the counterclaim. There 
may in some states be several such replies after the service of 
the complaint The procedure depends on the law of the 
particular state where the action is being brought. Each party 
must serve a copy of each paper in the action on the other 
party or his attorney. 

If what has been stated in the complaint does not make 
a legal cause of action, tlie defendant through his lawyer may 
object to it by filing a demurrer. A demurrer objects to the 
complaint on legal grounds ; for example, that it is not brought 
in the right court, or that the facts alleged, even if true, do 
not constitute a cause of action. 

Then the matter of the demurrer comes up before the 
court. It is argued by the lawyers on each side, and if the 
court decides that the demurrer presented by the defendant is 
well taken, the complaint is dismissed. The plaintiff can then 
usually get leave (by paying the costs up to date) to file a new 
complaint in which his lawyer will try to avoid the particular 
legal difficulty. 

If the court decides, however, that the demurrer is not 
well taken, it is dismissed, and this leaves the defendant to 
answer the complaint as to the facts, that is, as to the matters 
which have been alleged on the part of the plaintiff and denied 
on the part of the defendant. 

The foregoing statement of proceedings before trial pre- 
supposes very simple proceedings, but usually there are re- 
quests to amend and much incidental procedure, which tend 
to delay the trial of the main issue. 

§ 38. Trial at Law 

A¥hen the parties have finaHy come to an issue, i.e., when 
the plaintiff has alleged certain things and the defendant has 






LAW AND EQUITY 



27 



denied them or has interposed a defense, then the case is set 
down for trial, and takes its place on the court calendar. 
When cases that are ahead of it on the calendar have been 
tried, or postponed, the case is called, and the lawyers on each 
side are asked if they are ready. When both sides are ready, 
or have no excuse for longer delay, a jury is assembled and 
the judge proceeds with the case. In a court of law a party 
has a right to have a jury decide any disputed facts. 

The witnesses for each side are sworn and testify, then 
the case is argued by counsel for each party and goes to a jury 
to decide or is decided by the judge, or is taken under advise- 
ment by the judge, who will give his decision after due con- 
sideration. If the case goes to a jury, the jurymen are placed 
in the custody of a court officer until they reach a decision 
or find that they cannot agree. If the judge is to decide the 
case and takes it under advisement, it may be days, weeks, or 
months before he will render his decision. 

Since a jury is composed of human beings, it is likely to 
show certain very human characteristics in its decisions. The 
sympathies of the jury are usually with the under dog, whether 
he is plaintiff or defendant. Often the plaintiff, by the mere 
fact of going to court with his troubles and then by being 
heard first, has the better chance. If one party is a corpora- 
tion, the jury is inclined to regard it as a soulless oppressor, 
and to award damages in favor of the poor workingman, 
widow, etc., whom the corporation is supposed to be injuring. 

Very frequently clever and unscrupulous lawyers get in 
some touch to appeal to the sympathies of the jury, as a photo- 
graph of an injured man's wife and children, etc. These are 
usually ruled out by the court, but the effect on the jury has 
been gained just the same. It is to be remembered that if one 
man on the jury is stubborn, prejudiced, or dishonest, he can 
prevent a verdict and the whole expense and trouble of the 
trial has to be repeated. The law frequently breaks down in 



28 



THE LAW OF THE LAND 



vindicating rights because of the imperfect workings of the 
jury system. 

Note: 

I. Consider all the chances before bringing a lawsuit. 

§ ag. Bringing a Suit in Equity 

The outline given applies to a court of law. If the court 
is a court of equity jurisdiction, the procedure is essentially 
the same except that the first statement may be called a peti- 
tion or a bill in equity. In New York complaints are also 
used in equity. All procedure in courts follows generally the 
lines laid down, with many variations as to details and inci- 
dentals. 

A suit in equity can be brought only when the party cannot 
obtain justice at law. The other party must answer the peti- 
tion or the bill. Copies of all papers must be served on the 
opposite party by the party making the charges. 

In a suit in equity, only a judge, or several judges, hear the 
case. For this reason a court of equity is not so strict about 
keeping out evidence that does not properly have anything to 
do with the case, or that might prejudice a jury. The judge is 
supposed to know the law and to be guided only by such evi- 
dence as ought to be allowed to affect the decision of the case. 

A court of equity tries to give a remedy to fit the nature 
of the wrong that is being done. If the wrong consists in a 
refusal to perform a contract, the court will, in some instances 
where the contract should be performed, compel the offending 
party to carry out his agreement. (See Chapter XII.) If the 
wrong alleged consists in the defendant's continuing to do 
anything which is injuring another, the court will issue wha* 
is called an injunction forbidding the continuance of the in- 
jurious conduct Practically speaking, however, the courts are 
chary of granting an injunction where it may be avoided. 

It is useless to attempt to bring an action in equity unless 



LAW AND EQUITY 



29 



the party is certain that he can prove to the court that the 
damages which he can obtain at law will not compensate him 
for his injury, and unless he is willing to do everything which 
the court may require from him in the interests of justice. 
The maxim is that he who seeks equity must do equity. 

Another maxim in equity is that he who comes into a court 
of equity must come with clean hands, i.e., if the complainant 
alleges fraud, he must show that he has been scrupulously fair 
in all his own dealings. 

If the party resorts to equity when he should have in- 
stituted an action at law, he will merely find that he is obliged 
to go to the added expense of bringing action at law. The 
practice in equity is no less complicated than that at law. 

§ 30. Appeals to a Higher Court 

The decision of a trial may be appealed from by the dis- 
satisfied party. The unsuccessful litigant has to pay the dam- 
ages adjudged to be due his opponent, the costs of the suit, and 
the fees of his own lawyer. His fighting blood is stirred by 
the evidence that brings to mind the original dispute and the 
perverseness of the opposite party, by the arguments of the 
counsel on each side, and by the failure of the court and jury 
to give them the weight he feels they have, and he feels as if 
he would spend all he has to vindicate himself and to punish 
those who have wronged him. 

His lawyer feels much the same way, and, as he is paid 
for appealing instead of having to pay, he can better afford to 
indulge his feelings. Usually the first thing is to file excep- 
tions to the alleged irregularities in the trial ; that is, happen- 
ings of the following nature: 

That evidence was admitted which should have been shut 
out. 

That evidence was rejected which should have been ad- 
mitted. 



no THE LAW OF THE LAND 

That questions were allowed which should have been 

barred. 
That questions were disallowed which should have been 

allowed. 
That the judge charged the jury in a way he should not 

have charged it. 
That the judge refused to charge the jury as requested 

and as he should have charged it. 
That the verdict was excessive, or inadequate, or not 

supported by the evidence. 

Then a motion is made for a new trial and, if this is 
overruled, counsel announces that he will appeal. The losing 
party cannot commence a new action. He is barred from any 
such proceeding, otherwise a wealthy plaintiff could ruin his 
opponent by continued new actions. He can, though, in most 
cases appeal to a higher court. 

The appeal is a costly and complicated proceeding. All 
of the papers and much, in some cases all, of the evidence 
must be printed. Then the arguments of each of the opposing 
counsel, ironically termed "briefs," are printed. After more 
delay and often much sparring of counsel over points of 
procedure, the case will take its place on an appeal docket and 
in due course will be reached by the appellate court. Next 
the case is heard, which means that counsel for both sides 
appear and argue the case on appeal. Finally the court takes 
it under consideration and if a new trial is granted it must 
be tried again in the original court. In most states there 
may be indefinite appeals until the case has reached the court 
of last resort, been decided there on the last technicality, and 
a rehearing has been asked for and refused. There is always 
delay between appeals, and it is entirely possible for a law- 
suit to go on for years and become an heirloom, which is 
handed on from generation to generation. It will be seen 



LAW AND EQUITY 



31 



that the person or the corporation with the longest purse has 
a great advantage. Such a one can employ more experienced 
and abler counsel and can stand the mounting costs better than 
the person who has nothing but a just cause. 

Attempts have been made from time to time to simplify 
procedure and to make litigation less costly and less dilatory, 
but so far without any great measure of success. To laymen 
both courts and counsel often appear much more concerned 
in observing the rules of the game than in administering 
justice as between man and man. As stated in one of our legal 
periodicals: ^ 

While every other profession has been practically made 
over in the past twenty-five years, the conservatism of the 
legal profession has stood in the way of substantial changes 
in the rules of procedure and practice. 



>» 



Elihu Root, in the foreword to "Justice and the Poor' 
states : 

We have had in the main just laws and honest courts to 
which people — poor as well as rich — could repair to obtain 
justice. But the rapid growth of great cities, the enormous 
masses of immigrants (many of them ignorant of our 
language), and the greatly increased complications of life 
have created conditions under which the provisions for ob- 
taining justice which were formerly sufficient are sufficient 
no longer. I think the true criticism which we should make 
upon our own conduct is that we have been so busy about 
our individual affairs that we have been slow to appreciate 
the changes of conditions which to so great an extent have 
put justice beyond the reach of the poor. 

Ex-President Taft, in an address before the Virginia Bar 
Association, said: 

Of all the questions which are before the American 
people, I regard no one as more important than the improve- 



^ Case & Comment' for July, 1917. 



$2 



11 



THE LAW OF THE LAND 

mcnt of the administration of justice. We must make it so 
that the poor man will have as nearly as possible an equal 
opportunity in litigating as the rich man, and under present 
conditions, ashamed as we may be of it, this is not the fact. 

Note: 



LAW AND EQUITY 



33 



I. 



Before becoming involved in litigation reckon the 
cost, to the limit of the last appeal. 



§ 31. Advisability of Litigation 

There are circumstances under which it is necessary to go 
to law, and then its advisability is not open to discussion. 
Such circtmistances may be compared with cases in which 
surgical operations have become imperative. The only ques- 
tion then is to be sure that you secure a skilful attorney to 
represent you. But many cases arise where there is strong 
temptation to bring suit, but where it might be more prudent 
to compromise or settle by other means. What follows applies 
to these debatable cases. 

When you feel that you have been wronged and consult 
a lawyer, you want him to sympathize with you, to assure 
you of the merits of your case, and to advise you to show 
the other party that he cannot ride rough-shod over you. 
This is the lawyer's selling talk that you expect. You tell 
him to go ahead and cheerfully give him a check for a few 
himdred, which he says will be plenty to keep things moving 
until the case comes to trial. 

If instead, he tells you judicially that, while you have a 
good case, it will save time and money to compromise in 
some way rather than to litigate, you take it as an unfriendly 
act,' grudge him his modest fee for saving you a lawsuit, and 
tell your friends that he is too cautious ever to make much 
at the bar. Next time you have trouble you think you will 
find a lawyer with a little more "sand." 

Lawyers know that most men who consult them fed this 



way. As one lawyer expressed himself, it is easier to get 
a $i,ooo fee for trying a case than $ioo for effecting a com- 
promise. Therefore do not expect that your lawyer is going 
to punish himself to do you an unwelcome service. You can 
try this plan: 

Ask your lawyer to make you an estimate of what the 
case will be likely to cost in counsel fees, preparation for 
trial, court costs, and incidentals. Then inquire as to what 
amount of your time will be required for consultation, attend- 
ance on trial, waiting for the case to be called, etc. Estimate 
what your time is worth in your business and add to the 
previous amount. Estimate how much thought and worry 
you will put into it and how much this will detract from your 
business efficiency. Assume you get judgment in your favor 
and the case is not appealed. How does the account stand? 

You may have a good case and still lose out. Such things 
have happened. Appeals are possibilities. There is a chance 
of heavy costs and fees. Consider all eventualities before you 
decide on your course. 

Notes: 

I. Prevention is better than cure. "Beware of en- 
trance to a quarrel." 
Calculate your costs in advance. This discourages 

litigation. 
Tell your lawyer you would rather pay him to keep 
you out of litigation than to win your case. If 
he is young at the business he may take you at 
your word. 



2. 



Suggestions to Readers 

If possible, attend the trial of a ciznl case before a magistrate. 
This is the court where suits for small sums are brought ; its processes 
are simple and rapid. But its procedure is typical. Note the function 



u 



THE LAW OF* THE LAND 



of the magistrate, the counsel, the constable, marshal, or other officer 
of the court. Note how witnesses are called, sworn, examined, 
cross-examined. Note the arguments of counsel. Then answer these 
questions : 

I. After hearing the witnesses, how would you have decided 
the case? 

After hearing the lawyers argue, would you have decided 
otherwise ? 

Was the actual decision just? 

Allowing fair rates of payment for the time of the men 
engaged in the trial, for the judge, constable, parties, 
lawyers, and witnesses, how much did the trial cost the 
community? What was the amount involved in the 
litigation ? 

5, Was the suit a fair average as to time, amotmt involved, 
number in attendance, etc? 

6. Could you devise any better system for settling disputes? 



2. 
4. 



Review Questions 

1. Why is legal process to redress a wrong usually unsatisfactory? 

2. What is the distinction between "law" and "equity" ? 

3. In your state are there separate courts of law and equity? 

4. Can suit be brought against a person without giving him notice ? 

5. What is the object of the procedure in a suit before trial? 

6. What defects are there in trial by jury? 

7/ If you were party to a suit, would you rather have it decided 
by a jury or by a judge? Why? 

If a party fails to get a verdict or decision can he bring a 
new suit? 

What could be done to make justice cost less in time and money? 
Can you suggest any method of judicial reform? 

Should a lawyer advise litigation or compromise? What cir- 
cumstances should influence his advice? 



a 



10, 



CHAPTER V 



CRIMINAL LAW 

§ 32. Criminal Procedure 

Criminal law is administered in a manner different from 
the usual procedure at law and in equity. The state prose- 
cutes for crime, and, while the accused person is called the 
defendant, there is no plaintiff save the state. The designa- 
tion of a criminal case might be : "State of Ohio v. John Doe 
(name of accused)." In the different states there is more 
or less variation in the administration of criminal law. 

Criminal prosecutions are usually instituted by a warrant 
sworn to by the aggrieved party before a magistrate. The 
magistrate then summons the accused person to appear or 
issues a warrant for his arrest. In minor cases the magistrate 
tries the person, or in some instances the accused may demand 
a trial by jury. Where the offense is serious, the magistrate 
has only jurisdiction to commit the accused to await the 
action of the grand jury. In most cases the accused person 
is allowed to give bail to insure his appearance when the grand 
jury meets. 

Serious crimes must always be prosecuted by indictment; 
i.e., a written accusation authorized by a grand jury. The 
grand jury consists of eighteen or more men and is convened 
from time to time in each county to investigate any charges of 
crime that may be brought before it. Proceedings before a 
grand jury are, of course, ex parte, i.e., only one side is heard. 
These proceedings are under the supervision of the legal 
representative of the state, the prosecuting attorney. The 
object of the grand jury investigation is to ascertain what 

35 



3^ 



THE LAW OF THE LAND 



CRIMINAL LAW 



37 



persons should be tried before a trial jury and whether the 
evidence against people accused of crime is sufficient to justify 
the state in prosecuting them. If an indictment is foimd 
and the person has not been arrested, the authorities try to 
arrest him. The names of all who are indicted are placed on 
a criminal docket to await trial before a trial jury. The grand 
jury system is painfully cumbrous. 

In darker ages the criminal law was so often used as an 
instrument of oppression and for the punishment of political 
offenders and the criminal laws were so cruel, that popular 
sympathy was with the man accused of crime and gradually 
he was given various rights and privileges to even up his 
unequal contention with the powers of the state. It is not 
unlikely that this process has gone too far. 

In many states criminal procedure has become so complex 
and so overridden with technicalities that any criminal who 
can afford to pay skilful cotmsel may escape all penalty except 
the large payments he makes to his own lawyers. The diffi- 
culty of convicting a wealthy criminal is the scandal of our 
legal administration of justice. 

On the other hand, the criminal law as it exists is in- 
credibly unjust to the poor and ignorant. A widow with a 
dependent family started to sell fish in New York and failed 
to cover them over to protect them from the flies. She was 
arrested and fined two dollars. She did not have so much 
and was sent to jail for a short term, leaving her family of 
young children unattended.* 

If a wealthy young man is arrested for speeding, he is 
released on his own recognizance or a deposit of cash. The 
next day he is fined twenty-five dollars, promptly writes a 
check and walks away. Meanwhile we marvel at the growth 
of anarchistic thought! 

^Scribner's Magazine, July, 1919- Page 115. 



§ 33. Classes of Offenses Against the Criminal Law 

It is well to know that offenses against the criminal law 
are divided into two classes: felonies and misdemeanors, ac- 
cording to the degree of the offense. 

A felony is a grave offense, punishable by heavy penalties. 
A misdemeanor is a lighter breach of the law and is punish- 
able by lesser penalties. 

Burglary— the breaking into a dwelling house after dark 
with criminal intent— is a felony and is punished by confine- 
ment in a penitentiary. Driving an automobile too fast is a 
misdemeanor and may be punished by a fine or confinement 
in the county jail. 

Criminal offenses are also divided on another basis into 
two classes: those which are wrong in themselves and those 
which are wrong merely because the law prohibits them. In 
order to make this distinction easier to keep in mind, lawyers 
use the Latin terms "malum in se" (wrong in itself) and 
''malum prohibitum" (wrong because it is prohibited). At the 
present time there are a great many naturally indiflFerent 
actions which have been made into ' rimes by the procedure 
of the legislature, and there is such a multitude of these laws 
that it is very hard for anyone even with the best intentions 
to avoid violation of the law at some time. 

§34. Penalties 

The penalties for violation of the criminal law are fines, 
imprisonment, and, for a few offenses, death. In this country 
the Constitution of the United States prohibits banishment 
and forbids cruel and unusual punishments. 

In no direction is there greater room for reform than in 
our treatment of criminals. Many of these are as they are 
by reason of environment and lack of training. Others are 
mental defectives who should be humanely kept from tempta- 
tions they cannot withstand. It may safely be said that our 



If 



■HP 



38 



THE LAW OF THE LAND 



criminal law as it is generally administered does not prevent 
crime, reform the criminal, or deter others from crime. 

The most dangerous and vicious criminals are those who 
are mtelligent and educated and use these advantages to keep 
clear of the clutches of the law, while they do things that in 
effect injure their fellows far more than aU the burglars and 
murderers in the country. These are the "malefactors of 
great wealth" that roused Roosevelt's honest wrath. The 
criminal law always lags behind, and enactments to check the 
crimes of such as these unfortunately catch only their clumsy 
imitators. 



Review Questions 



1. Who is the plaintiff in a criminal case? Why? 

2. What is the function of a grand jury? 

3. Can you suggest any method of improving the administration 

of our criminal law? 

4. If a certain action, harmless of itself, has been made a crime, 

does it thereby become morally wrong? 

5. If a man is willing to pay the penalty, say for speeding, does 

that justify him in disregarding the law? 
4 What are the two classes of offenses against the criminal law ? 

Give an example of each. 
7. Outline the usual criminal procedure. 

a What is the primary object of legal penalties for crime: (i) 
retaliation, (2) protection of the community, or (3) the re- 
formation of the criminal? What should be the object, or 
objects of the criminal law? 
9. Which are the greater deterrents of crime— severe penalties, or 
more moderate punishments? Why? 



PART II 
CONTRACTS 



CHAPTER VI 

ESSENTIAL FEATURES OF A CONTRACT^ 

§ 35. Introductory 

Civilized life may be said to be founded on agreements. 
Whenever an individual buys or sells something, he makes 
an agreement. Our whole social and business life is based 
upon a series of understandings with those with whom we 
come in contact. The more complex our civilization becomes, 
the more agreements are made and the more extended be- 
come our contractual relations. 

Whenever an agreement is of such a nature that it may 
be enforced in a court of law, it is called a contract. Most 
of the laws on our statute books and most of the laws affect- 
ing the daily life of the individual have to do with the sub- 
ject of contracts. The sale of goods is a contract, the 
appointment of an agent is a contract, and the business done 
by an agent is that of making contracts. Insurance, whether 
of life or of property, is a contract; partnerships and corpora- 
tions are both based on contracts; in fact, there is no business 
relation but is either itself a contract or else is based upon 
a contract. 



§ 36. Definition 

A contract is defined as an agreement between two or 
more parties, for a sufficient consideration, to do or not to do 
some specified thing or things. This is the accepted legal 
definition of a contract. 



> For forms of contracts, se« Chapters XCVIII-CI, Forms 1-25. 

41 



42 



CONTRACTS 



fi 



It is an agreement, and the minds of the parties, to use 
the technical phrase, "must meet." 

There must be two legally competent parties to a contract; 
there may be many. 

There must be a consideration, without which there can 
be no legal obligation. If a man agrees to do something, 
there must be a valid reason or inducement for him to bind 
himself. This, in legal parlance, is the consideration. If 
the promise were gratuitous, that is, if there were no induce- 
ment for the promise, it might be a matter of honor to carry 
it out, but it would not be a matter of legal compulsion. A 
naked promise, without consideration, cannot be enforced in 
a court of law. 

There must be the obligation, or thing to be done. This 
promise may be to pay money, to do work, or to deliver 
goods; or it may be merely not to do something which the 
person contracting had a right to do. 

§37. Essential Features 

In order to make any agreement legally enforceable as a 
contract, there must be the following essentials: 

The parties to the agreement must be legally com- 
petent to contract. 
The agreement must be to do something lawful. 
The parties must agree to the same thing. 
There must be a sufficient consideration. 



I. 



2. 

3- 



I i 



These several elements of a contract will be explained in 
the following sections. 

§ 38. Competency of Parties 

The parties to a contract may be individuals, partnerships. 
or coiporations. The partnership name mav be diflferent fronj 



ESSENTIAL FEATURES OF A CONTRACT 43 

the names of the partners composing it. The laws of most 
states provide that one or more persons may associate them- 
selves under any name they choose to assume for business 
purposes, and upon recording it in the proper offices together 
with their own names and addresses may do business and 
contract under the assumed name. 

A person would bind himself if he contracted under an 
assumed name. The other party might not be bound, if he 
was deceived. 

Generally all persons are able to bind themselves by con- 
tract. It is a positive right. But there are exceptions to 
the general rule. Certain persons are not competent to con- 
tract, and certain other persons have only a qualified right 
to make contracts. 

If a person has been legally declared a lunatic or a spend- 
thrift, and a guardian has been appointed by the court to 
look after his property, such person has no power to enter 
into a binding contract. No agreement made by him could 
be enforced, even though the person dealing with him did 
not know that he was insane or a spendthrift and had been 
legally declared incompetent. There is one exception to this 
rule— a contract to buy absolute necessities for life and health 
A person may supply an insane person with necessary things 
and will be legally entitled to payment for them. 

As it is necessary for a party to give his free consent to 
an agreement and to know what he is consenting to, intoxi- 
cated and insane persons who have not been legally declared 
to be such, cannot make enforceable contracts if the insanity 
or the intoxication prevents them from understanding the 
nature of their acts at the time the contract is entered into 

The Law Varies with Location. This question of com- 
petency depends on tiie law of the place where the contract 
was made. If a person legally declared a spendthrift should 
go into another state, he would be perfectiy capable of making 



I 



i 



ii 



44 



CONTRACTS 



m 



contracts there until he has been declared a spendthrift in 
the courts of that state. A person legally declared insane, 
if he had lucid intervals, might in a state other than that in 
which he had been declared insane make an enforceable con- 
tract in a lucid interval. The age at which a person becomes 
legally competent to contract varies in different states. The^ 
local law should always be consulted. 

Indians. Indians living on government reservations are 
protected by the federal law, and may make enforceable con- 
tracts only imder such conditions as that law prescribes. If 
they leave the reservations and enter into ordinary business 
relations, they are usually held liable in the same way as any 
other business men. 

Married Women. "K married woman does not have entire 
freedom of contract. As a usual rule a married woman can- 
not make an enforceable contract with her husband. Formerly 
a married woman could not make a contract at all without 
her husband's consent, but this has been changed. It is safest 
to consult the law of the state in which one resides before 
entering into a contract with a married woman, as a few 
states still give her a measure of irresponsibility. A married 
woman may, in any state, act as an agent for her husband. 

(See § 128.) 

Minors. Minors (persons who are under legal age, which 
is generally 21) have only a qualified ability to make con- 
tracts. That is to say, the minor may make a contract but 
the other contracting party cannot enforce it if the minor 
chooses not to perform his part. The minor may even annul 
th^ contract after it has been performed, return the property 
and demand his money back, or vice versa. If the minor 
has taken a fraudulent advantage of the other person by lead- 
ing that person to think he is of full age, the law will later 
prevent the minor from stating that he is under age when 
he comes into court, and will therefore make him perform 



ESSENTIAL FEATURES OF A CONTRACT 45 

his agreement. If under the contract the minor has received 
property or money from the other party, he will be made to 
repay or to return it if possible; but if he has spent or other- 
wise disposed of it he may, as a rule, still refuse to repay or 
return it. 

People dealing with young persons are supposed to look 
out for their own interests and to find out whether such 
parties are of age or not. The minor, because of his in- 
experience, IS guarded by the law not only against the designs 
of other persons but also against his own carelessness. He 
IS not, however, guarded against his own wrong-doing If 
he injures property he will be obliged to pay damages. 

After a minor has come of age he may confirm any con- 
tracts made while he was a minor. He may do this either 
by words or by acts. If he keeps the property obtained 
under such a contract for an unreasonable length of time 
however, the court will consider that he has confirmed it' 
Moreover, unless the minor pleads his infancy in court a 
contract may be enforced against him as against anv other 
person. No one else may plead this for him. If he becomes 
insolvent, a receiver of his property may not call off any of hie 
contracts for him, no matter how unfair. If the minor himself 
chooses to stand by them, they are legally binding. 

Note: 

I. It is not safe to have any business dealings with a 
minor. 

§ 39. The Subject Matter Must Be Lawful 

The subject matter of a contract is that which the agree- 
ment is about. It may consist of any property, commodity 
or service which could be the subject of a business transaction' 
or It may be to do or not to do something, such as to pay 
for the privilege of naming a child, or to pay a young man 
to abstain from using tobacco. 



i 



^( ii 



46 



CONTRACTS 



An agreement to do anything contrary to law would be 
unenforceable. An agreement to do anything which, while 
not directly contrary to any special statute, would be in- 
jurious to the peace and good order, the health, or the morals 
of the community, would be against public policy and would 
be unenforceable. 

The following agreements would be contrary to law or to 
public policy and therefore unlawful: 

1. An agreement to prevent a person from marrying or 
to break up a marriage. 

2. An agreement to persuade one person to marry an- 
other. 

3. An agreement in restraint of trade. The Supreme 
Court has decided that agreements in reasonable restraint of 
trade are not contrary to public policy. Where a person sells 
out his business to another he may agree not to engage in 
that business again within certain reasonable territorid limits 
and for a limited time, but the majority of the cases in this 
country condemn contracts to restrain trade throughout the 
entire state or in the entire country for an indefinite period. 
It is considered to be against public policy that the people of 
the whole state should for any length of time he deprived 
of the industry and skill of anyone engaged in a useful em- 
ployment. 

4. Gambling contracts. Contracts for the buying and 
selling of "options" and "futures" and of stock "on margin," 
are regarded as gambling contracts in some states, and will 
not be enforced unless the party selling the stock was in some 
way entitled to it or was selling it as agent for the real owner. 

'Fire insurance can be taken out on property only by a 
party who has some interest in it, and life insurance only by 
the party insured, his wife, child, or some other person who 
would be entitled to support, or by a creditor who had a 
claim against the person whose life was insured, or by a 



feSSENTIAL FEATURES OF A CONTRACT 47 

business partner or employer. Otherwise it would merely 
amount to a wager as to whether the property would be de- 
stroyed or when the person would die. 

5. Contracts in which usurious interest is charged. Some- 
times the contract itself will be enforced, but the partv will 
be prevented from collecting interest; sometimes he will not 
be allowed to enforce any part of the contract. 

6. Contracts to commit a fraud or a crime. 
7- Contracts for the sale of adulterated goods 

8. Contracts to bribe public officials, or contracts of 
bribery with such officials. 

9. Agreements by candidates to appoint persons to posi- 
tions in case said candidates are elected, or to do anything 
else m return for aid in securing their election. 

i^; ^^[^^""^"^^ "^^ to prosecute a person for a crime 
All of these last cases are contrary to public policy be- 

cause the subject matter pertains to something unlawful and 

injurious to the community. 

II. An agreement made in advance not to take a dispute 

into court. The law favors the settling of disputes out of 

court as much as possible; but it is contrary to public policy 

It'^l'^r^""'^ '" "^"""'^ "^ ^'' '''^^' '^ be heard in 
court whether by agreement or otherwise. But, while two 

parties may not contract to refrain from taking a possible 

disagreement to court, they may contract to arbitrate in a 

specified manner before the court is resorted to. 

12 A contract to perform services in return for money 
made by a medical student before he has been licensed, bv a 
law student before he has been admitted to the bar, or by anv 
other person who is required by the law to submit to certain 
requirements before being licensed to practice his profession 
or vocation and who is not yet so licensed, is void; any fees 
which may have been agreed upon cannot be collected. 

When an illegal contract has been made, the courts will 



•*^ 



48 



CONTRACTS 



ii i 



refuse to interfere at all. The parties are simply left as they 
are, to straighten the matter out as best they can. 

Notes: 

1. A contract to do anything unlawful cannot be en- 

forced. 

2. No money paid on such a contract can be recovered. 

3. No services so rendered can be made the basis of a 

suit. 

§ 40. The Law of Place 

The law which governs a contract is the law of the place 
where it was made. If it is to be performed elsewhere, the 
parties may, if they wish, expressly state that it is made in 
conformity with the law of the state where it is to be per- 
formed, provided they do not do so in an attempt to evade 
the law of the state where it was made. A contract made in 
good faith to be performed elsewhere need not comply with 
the law of the state where it was made if there is a conflict 
between the two laws, but the fact that it is to be governed 
by the law of a state other than that in which it was made 
must always be expressly stated in the contract. (See also 
§38) 

§ 41. The Subject Matter Must Exist 

There must be some subject matter in existence to contract 
about. If the contract were to add a wing to a house and 
the house were burned down at the time of the agreement 
without the knowledge of the contracting parties, there would 
bC'no contract If, however, the contract was about some- 
thing that has been lost or destroyed but that might be re- 
placed, such as a contract for the sale of grain, the contract 
is valid and the party who agreed to deliver the grain must 
procure it elsewhere. (See also § 88.) 



ESSENTIAL FEATURES OF A CONTRACT 49 

§ 42. Agreement of the Parties 

It is essential that the parties to a contract agree on the 
terms ; or, m legal phraseology, tliat "their minds meet " This 
agreement results usually from an offer made by one party 
which is accepted by the other. The offer or proposal may 
be oral or written, and the acceptance may be oral or written. 
1 he simplest form of contract is an offer to sell goods at a 
specified price and an acceptance of the goods at that price. 
If this offer is made by letter and the acceptance is made by 
letter, the two letters taken together constitute a complete 
contract of sale. Some other points might be mentioned, but 
these the law will supply. When nothing is said as to terms, 
the law implies cash. When nothing is said about delivery 
the law implies that the buyer will be entitled to deliver^^ 
when he pays the price. ( See Chapter XVI. ) 

Acceptance by Mail or Telegraph. If the party making 
tl^ offer requests an answer by mail or telegraph, the post- 
office or the telegraph company becomes his agent to receive 
the acceptance, and the agreement becomes effective the mo- 
ment a properly stamped and addressed letter of acceptance 
IS deposited in the mail-box (even though the letter does not 
reach its destination) or the moment a prepaid telegram (un- 
less the other party had directed that it be sent "collect") 
with the proper address, is given to the telegraph company to 
be sent. ' 

The point is important because the person makin? the 
offer has a right to withdraw it if he informs the other party 
of his change of decision before the other party has accepted 
>.e., has put a letter in the mail or has sent a telegram of 
acceptance. In other words, a contract may be complete before 
the acceptance is actually received, and it is then too late to 
withdraw the offer. 

If a party makes an offer by mail or telegraph, he is 
regarded as having requested a reply by the same means 



so 



CONTRACTS 



unless he expressly asks for a reply in some other way; so 
that if the party receiving the offer replies in the same wav 
his acceptance becomes effective from the moment he mails 
It or gives it to the telegraph company to send. If, on the 
contrary, he replies m some other way, there is no agreement 
until the aiisiuer actually reaches the other party. In this 
last case, if the first party sends a letter withdrawing the offer 
and this letter arrives at its destination before the letter of 
acceptance reaches the first party, there is no agreement 

Manner of Acceptance, The offer must be accepted in 
accordance with its terms. To accept an offer in any terms 
other than those in which it was made amounts to a refusal 
The first party may decide to accept the new terms, in which 
case there wiU be a new and different agreement, but he has 
the privilege of rejecting the proposed contract entirely If 
the offer was made to one person only, another could not 
accept It; if made for a limited time, it must be accepted 
within that time. Advertisements offering a reward for the 
return of lost articles are made to the public in general and 
the offer may be accepted by anyone who finds the goods 
An offer cannot be accepted, however, after the party who 
made it dies or becomes insane, and it must in any case be 
accepted within a reasonable time; people cannot be held to 
offers made long ago and forgotten, or after the circumstances 
which led to the offers have changed. What constitutes a 
reasonable time will depend on the circumstances. The party 
who makes the offer may set a time limit for its acceptance 
after the expiration of which the offer is no longer open for 
acceptance. It is always prudent to accept a desirable offer 
promptly. 

Options, In negotiations an option or refusal may be 
given, good for a certain time. Unless something has been 
paid for an option, it may be revoked at any time because 
It is an agreement without consideration. An option so given 



ESSENTIAL FEATURES OF A CONTRACT 51 

is a contingent offer and may be accepted at any time before 
withdrawal or expiration of time. 

§ 43- Oral Agreement 

In many cases of contract the parties agree upon the 
terms orally by discussion, proposal and counter-proposal, 
suggestion and objection, until they think that they have 
arrived at substantial agreement. At this stage the contract 
should be reduced to writing. When this is attempted it will 
usually develop that each party has understood the discussion 
differently and a renewed discussion results. Finally, when 
the written agreement is agreed to by both, it is signed ; and 
then it supersedes all understandings and binds the parties. 

In most cases an oral contract is as good as a written one 
except that it is harder to prove. After a discussion of terms 
each party has a different impression of the conclusions 
reached. Certain parts deemed favorable by one party are 
most strongly impressed upon his memory, while other parts 
not so agreeable are not so well remembered, and after a year 
or so two men can honestly go into court and swear to 
absolutely contradictory accounts of the same transaction. 
Here the great advantage of the written agreement becomes 
apparent. That which is written changes not; and the law 
will not allow oral evidence to be introduced to contradict 
that which the parties have agreed to in writing. If, mean- 
while, one of the parties has died, the written contract is vet 
more essential for proof. Hence, in business, one should 
never entrust to memory anything that can possibly be put 
mto writing. (See §§ 46, 47.) 

Notes: 

1. In most disputes over contracts, the trouble arises 

because part or all of the contract is not written. 

2. On this account the exchange of letters makes for 

certainty in contracts. 



52 



CONTRACTS 



!l 



i 



§ 44- Consideration 

■ a cotrC"'"' "" ^'^ soniething or to give something is not 
a contract, since a mere promise rann^f u ."""""« '^ not 
There must be a con.irlL. f T ^ enforced by law. 

tion being soletZ.;" ""^ *' P™*"'^^' *^ "^^n^idera- 
party "^ something done, given, or promised by the other 

One party's promise is a good consideration tr. .u 
promise of another party. If A agrees to n, r ^ *^ 

service and B agree' to^erform'S e^fce f ^.hr"" 
tract has been created and A must fnlfiM '°"' 

B has fulfilled his Or if A Z ' ^'"""'^ ^'^^" 

delivered to C. when B hi'^^^Je^X^VmLf ofV^""^ 

promise in return for .„^*u . ^ P^'''°" '"^es a 

require him t^™ie ^0..- ^"■'°" ' P'^™^^' *^ ^^^ ^iU 
has fulfille" Us^W^:j:Zlf^ *^ ^^^^ ^^^ 
sideration for each other An P™""'"' ^''^ «=«"- 

ordinal, real eTtJe Xf Ih^r^ o^Tart^ '°""' ^ ^" 
seU and the other party promiles Tbu; The' o'n'r'":- '' 
for an enforceable contract may be vert ;,n.ll '*'""^Y^"«" 
the vali«» nf «,»,..* • ''^'- "ay oe very small compared with 
uie value of what is agreed to by the other oartv it m, k 
inadequate or even insignificant. ^' ^ "^ 

For instance, a man might offer to rive hi^ <^n «, ~^ -r 
he woi^d ref^ f.om smoLg until he'^;:';^/^^ It 

money, but he is giving up the right to smokp_n„^ *i, 
tract will be enforced. In this case fh! ~^^"d the con- 
$1,000 is the surrender of a privS^*' consideration for the 

It IS very common to mention the sum of <fiT ;« 
where the parties do not wish the ^ei loi "f T^T 
Sideration to be known. In most rA<;pc ^«. a n "" 

however small or nominal, if given or st,n.,lof J * • ' 



ESSENTIAL FEATURES OF A CONTRACT gi 

A Stipulation in consideration of one dollar is quite as effectual 
and valuable a consideration, as the larger sum stipulated and 

Impossible Consideration. If the consideration agreed to 
by one of the parties is something impossible to perform the 
contract is void and unenforceable. This would be true if one 

!L ^T'"" ^^"."^ '"^ ^° "" '"^^^J «ct •" return for the 
other party s promise. He could not be required to perform 
It; consequently he has given nothing penorm 

is not'"'."^ ^o^'^thing that one is already obliged by law to do 
IS not a valid consideration; for instance, a promise to pay 
a debt already owed would not be a good consideration for 

fnlnU "fr""'?- Al "^'■'''"'"' '"^ P^y J^^" «f ^ debt due 
m full setUement would not be any consideration for the other 

half which the law would still hold to be a binding debt 
(See § 500.) ^ "'^• 

.on ^7! ^"d affection for one's friends and relatives do not 
cons itute a legal consideration for a contract. One does 
not love them more or less on account of the agreement 
There IS no change in the situation of the person which would 

0^1 VrT '"■ *' ''" '"^ '"^^^^^^^ *° --"P^' *e other 
party to keep his promise. 

Notes: 

I. Some consideration should always be mentioned in 
the contract. 

It is wiser to name the true consideration, as then 
there can be no misunderstanding if it becomes 
necessary to prove the contract in court 

The matter of no consideration comes up again and 
again m legal practice, making void otherwise 
good agreements, and the principle should be 
thoroughly comprehended. 



2. 



'Uwrence v. McCalmont, i Howard (U. S.) 446. 



! 



54 



1 



CONTRACTS 



Review Questions 



1, What are some common synonyms for the word "contract"? 

2. What is the legal definition of a contract' 
* ^^s''^e7^^'-'''"r'^'''''''^'"''°'^'--'^-'=^- What 
4. Who are comL. ff^P'^"^ => "*««-<= obligation in a contract. 

to make contracts? If a person not competent to make a 
contract s.gned an agreement, what would be the effect" 

^n^LhVriire- " """'"'' *°-^"'^ =°™ - "^-^ -te 

7. What ,s the legal age of majority in your state? 

8. If a mmor represents himself as of age, what is the effect' 

'" i^yTr it^tu" ""t^t' =°"'' '^ ''-' '-"^ -"- to 
,„ H^r^ Suppose he had wrecked it? 

o. When may a creditor enforce a contract against a minor' 

".^is%re;r'""°^'''"''^"^-"-"°^— ^««e? why 

'^o'diltit^i mip -""^'^ ''■■-''"-■^■•"•' ^-^ ^^ ^' -afe 
What two classes of contracts are unenforceable? What aeree 
ments about marriage are unenforceable ' ^ '" 

wSlare "ir" '' '° "'^'^"'^'^ i" restraint of trade"? 
wnatare wagenng contracts" ? 

It' wh« '!J'" "" ''^ '° "^"'y •" y°"' *'«e? 

a wu ° agreements are illegal ? 

■ of" ht'iat whirTT • '' ^ T''"' ''"-'^' 'y ♦"« '- 

delivered in Vr^-f " u"**^'' ^ ^^^^^ '^^cuted and 
^''vered m California is the subject of a suit in New York. 



12. 

13- 

14. 
15. 



19. 



20. 



21. 



22. 



ESSENTIAL FEATURES OF A CONTRACT 55 

What laws govern the vah'dity and construction of the con- 
tract? What laws govern the remedy? 

What is the rule as to existence of the subject matter? If a 
sale were made of a particular horse at another place and 
the horse had died before the contract was made, what would 
be the effect? Suppose the purchaser had paid for it? 

What terms as to payment are implied in a contract? As to 
delivery ? 

When do the minds of the parties meet in a contract made by 
mail or telegraph? What is the rule as to the method of 
acceptance ? 

A writes and offers goods to B, in another town, at a stated 
price. B receives the offer and immediately writes back to 
A his acceptance. The letter is deposited in the mail-box 
but never reaches A. A, not hearing from B, offers his goods 
to C, whose acceptance reaches A. B sues A for breach of 
contract. Has he a cause of action? Why? 

A, on March 21, wrote B, a day's journey away, and offered 
B a position. He ended his letter by saying: "You will confer 
a favor by giving me your answer by return mail." B received 
the letter on March 22. B on the 23d wrote her acceptance 
and gave it to a boy to mail. The postmark showed that it 
was not mailed until the 25th. A not receiving answer offered 
position to another. B sued for breach of contract. Has she 
a cause of action? 

What is the effect of accepting with a slight variation of terms? 

How long does an offer stand open? 
Why is a written contract better than an oral contract? Why 

should the terms of an agreement be definite? 

26. Why cannot an agreement without consideration be enforced? 

27. If a man owes $100 and agrees to pay $50 in discharge of the 

debt, can he be made to pay the remainder ? Why ? 

28. Without other consideration is payment of a smaller sum ever 

satisfaction for a debt of greater amount? 



23- 



24. 



25 



CHAPTER VII 

HOW CONTRACTS ARE MADE 

§45- Classification of Contracts 

In this book contracts have been class}fi«l =,..„ a- 
function, into contracts of sale con^rffT according to 
tain other more arbitrary T:'^^T 1 ^^""'^' ^*^- ^er- 
only occasionaDy reS t f 0^^ 'T'*=''' ^^"^"^ 
subject of examfnation queslns X";t ""' ^'"'"'"*'^ *«= 
sifications are explained rrpL^rchtter^" ^'^^^ ^'- 

who Xif tht s^rs^o'Lirt 1^'^^*'°"^"^' •'"^ *- 

the required contS, ranrr^aHf^r '! ^ ^^^ 
rules of loric For pv=.™„i '^ ^''^ ^°"ow the 

are contracTs of ^l^t;r? o'fT" ''""'7 '^^ ^^^ 
Judgnients and -ognLc^^^As a ^ar^ffaTV' 
a judgment nor a recoenizanr^ ;= , . *^' "*'**='" 

legal definition. CSS^^n^rS ^tV^ ^ 
«s no agreement Nevertheless the text IJkc " n V ' 

entries "contracts of record." " *^'^ '^^"'^ 

i^ther common question is: What is a «mni» * , 
and the answer exnected ic • a . f "^'^ contract ? 

seal. In fact. Stord Imn. "t* °^ ''~^^ °' ""'J^^ 

pound. compi;xtrI^carSirrantarf °' ^°'"- 
simple contracts are more complex aTJhr u "^'"^^^ 
tract under seal such as , I P'^"" ,*"^ ^^^'^sc than a con- 

/ uu not make it complex or affect its 
56 



HOW CONTRACTS ARE MADE 57 

Character in any way. Nevertheless, those who are preparing 
for exammation must know how to answer questions of this 
sort upon occasion. 

Contracts, then, may be classified in regard to dignity and 
facility of proof as follows: (i) oral contracts. (2) written 
contracts not under seal or of record. (3) contracts under 
seal, and (4) contracts of record. 

AU contracts not under seal or of record are caUed simple 
or parol contracts whether in writing or not 

Fomal contracts are contracts of record, bonds and 
recognizances, and contracts under seal, which include all deeds 
and instruments affecting land that are required to be recorded 
in offices of pubhc registry. 

§ 46. Oral Contracts 

A contract may be made simply by word of mouth or by 

words and acts. Such a contract is called an oral contract 

; '* r^ """^^ necessary to go into court in order to enforce it 

It will be necessary to prove it by oral testimony. The parties 

to It will be called on to testify as to what was said and do^e 

Z. ^"5: °*"^ P^°P'^ ^^^« P>-«ent either party may call 
them as witnesses. j y-o^^ 

In such a case the difficulty is that the agreement has not 
been reduced to writing and the various parties present prob- 
ably have enbrely different ideas as to the meaning of what 
Aey heard. The court may decide that the testimony as to 
what happened is so vague and contradictoiy that it cannot 

insist rt.,r ' '""'•■''^ ^^' P"'*^^"* •'"^•"^^^ ^^ will 
insist that an agreements be made in writing and properly 

X ^hl" '; ^1. *"^ "^^ "^ "^ ^"^^''«" -« to just 
what obligations he has assumed or what he may properly 

expect from the other party to the contract. . Some contract! 
must be in writing or the courts will refuse to enforce them 
^oee 8 40.) 






5^ CONTRACTS 

Notes: 

1. Avoid oral contracts. 

2. Have all contracts written and signed by the parties 

thereto. 

§ 47- Written Contracts 

The written contract need not be a formal document Two 
letters, one making a proposition and the other accepting it 
constitute a contract just as much as a legal document duly 
signed and sealed and acknowledged before a notary. 

The written contract should contain all the terms— the 
names of the parties; a statement of the consideration, with 
the tune and the method in which it is to be paid or per- 
formed; a dear statement of just what is agreed upon, when 
It IS to be done, and in what manner; together with any 
arrangements the parties wish to make if something happens 
to render the contract impossible of performance, or in case 
It is only to be performed under specified conditions. (See 
Chapter XCVIII, "Drafting a Contract.") 

Business men are accustomed to expressing themselves 
clearly, concisely, and explicitly in their letters. Letters and 
copies are always carefully filed and preserved. For this 
reason when legal assistance is dispensed with, a letter from 
the party making the offer and a reply from the party accept- 
ing or rejecting it are usually the most satisfactory method 
of securing a written contract Each party has his own 
records. Since they are accustomed to expressing themselves 
by letter, they understand what thev have agreed to better 
than if the terms were expressed in formal, legal phraseology 
Even if a lawyer is called in later, the exchange of letters is 
a good way of making an agreement. If there is an extended 
correspondence before the parties finally arrive at an agree- 
ment, the last letter should sum up all the terms on which 



HOW CONTRACTS ARE MADE . 



59 



they have finally agreed, and this should be answered by a 
simple letter of acceptance, repeating the terms as therein 
stated. (See Chapter C, Forms 13, 14.) 

Note: 

I. Write all contracts. Never trust to an oral under- 
standing. 

§ 48. The Statute of Frauds 

In order to do away with the uncertainty of relying on 
people's memories in contracts by word of mouth, there was 
passed in England in 1676, a law called the Statute of Frauds, 
which required certain contracts to be in writing. This statute 
has been copied into the law of most of the states of the 
Union. 

The Statute of Frauds requires that the contract shall be 
proved by some memorandum in writing. It is not necessary 
to make the memorandum at the time the contract is agreed 
upon. If any memorandum or letter containing the essential 
terms of the contract, i.e., the names of the parties, the con- 
sideration, and enough to show the nature of the agreement, 
and signed by the party to be held, is written at any time 
before the other party comes into court to enforce the con- 
tract, the requirements of the law are satisfied. 

Form of the Memorandum, The memorandum must be 
signed by the party against whom it is to be enforced, or he 
will not be liable under it. It need not be signed by the other 
party. Under the law as enacted in some states, this signature 
must be at the end; in others it is sufficient if it is put in any 
part of the memorandum with the intention of signing. This 
written memorandum need not be one paper ; it may be written 
on two or three sheets if all refer to each other plainly and 
together make a complete memorandum of the terms of the 
contract. At an auction or a sheriff's sale, the auctioneer or 



II 

II 



6o 



CONTRACTS 



II 



i 



I 



the sheriff is the agent for both of the parties and may sign 
a memorandum for either of them. 

Contracts Which Must Be in WriHng. The following 
contracts must be proved by a written memorandum : 

1. A contract where the consideration is marriage. 

2. The promise of an executor or an administrator to 
pay a- claim against an estate which is in his charge out of 
his own money. If any property of the estate is left, the 
claim wdl be payable out of that, but in any case the executor 
or the administrator will not be liable personally unless there 
is a wntten agreement 

3- A promise to be responsible for the debt, the default, 
or the miscarriage of another. This means a contract of 
suretyship or guaranty, which wiU be explained later. (See 
Part XIII, "Suretyship.") 

I f i^?"^^^^ ^°' *^ ^« of land or of any interest in 
land. This does not refer to a deed, but to a contract to 
give a deed. A deed must always be in writing. A deed 
which is not in proper form to operate as a deed may some- 
times operate as a contract to seU the property, and the party 
will be compelled to give a good deed. A defective deed can- 
not be corrected without much trouble. 

If a person makes a contract to sell or to buy land through 
an agent, the agent must in most states be given authority 
m wnting to sign the contract 

Growing things, such as trees, grass, and plants that come 
up of themselves every year are regarded as part of the land 
and a contract to sell or to buy them must be in writing 
Crops which have to be planted every year are not regarded 
as part of the land even while they are growing. 

A lease of real property, if it is to last for over a year 
must usually be in writing. ' 

5- A' contract which is not to be performed within a year 
from the time it was made. A contract which might possibly 



HOW CONTRACTS ARE MADE 



6i 



be performed in a year, although it might take longer, need 
not be in writing to be enforceable. It is always better, how- 
ever, to have such a contract in writing. 

6. A contract for the sale of personal property of over 
a certain fixed amount in value. (This is explained fuUv in 
Chapter XVII, "The Statute of Frauds.") 
Note: 

I. The fact that an oral contract may be unenforceable 
because of the Statute of Frauds is another reason 
why all contracts should be in writing. 

§ 49- Contracts Under Seal 

The use of the seal is a survival from the time when very 
few people could read or write. The seal was used on the 
most important documents as we use a signature today Be- 
cause of the importance that was attached to it then, the seal 
IS still used on documents of the greatest importance. 

Deeds and mortgages of land, and in some states wills 
must be under seal. A power of attorney to deed land alsci 
requires a seal. A seal on any document such as a deed or a 
contract is regarded as showing that there was consideration 
for the deed or the agreement whether any is mentioned in the 
document itself or not In this country, however, a person 
IS usually allowed to prove that there was no consideration 
even if there is a seal. ' 

A seal may in many states be merely a scroU. In others 
a little red wafer is used. In New York the letters L.S {locus 
stgtlli, the place of the seal) which were originally intended 
as instructions as to where the seal should be placed, are now 
regarded as a sufficient seal. 

A corporation generally verifies papers, particularly im- 
portant documents, with its corporate seal. 

A contract under seal is also called a contract by specialty 



\ 



62 



CONTRACTS 



The word "covenant*' is applied as follows: (i) It may be 
a written agreement under seal; (2) It may be a modifying 
agreement contained within a deed or other sealed instrument; 
(3) It may be a clause of an agreement contained in a sealed 
mstrument. 

Note: 

I. Seals are generally required in connection with legal 
papers dealing with real estate, on bonds, and 
sometimes on wills. 

§ 50- Contracts of Record 

Contracts may be distinguished as to whether or not they 
are of pubUc record ; that is, filed or recorded in some court 
or public office. The highest form of contract of record would 
be a judgment, which may be called a contract of record 
although it lacks any element of a contract. It may be founded 
upon a contract, but when a judgment has been secured so 
tnat it is of record, it becomes a claim that can be collected 
at any time at the option of the party in whose favor it has 
been rendered. 

Another form of contract of record is what is called a 
recognizance. In certain legal procedures a party is required 
to give bond or furnish surety that he will appear before the 
court at a certain time or that he will keep the peace, observe 
the terms of an injunction, or do some other thing. Though 
this is a compulsory proceeding, and has no single trace of an 
agreement or a consideration, it is nevertheless caUed a con- 
tract of record. 

Othei- contracts of record are deeds, mortgages, contracts 
to convey land, or other instruments which, after being ac- 
knowledged before a notary public, are filed or recorded in 
the office of registry for record for the particular locality. 
Acknowledgment is a prerequisite to registration. (See 



IIOW CONTRACTS ARE MADE (,^ 

Chapter XCIX.) These have been referred to alreadv as 
^r^ under seal because most of them are evide^S b; 

§ 51. Express and Implied Contracts 

An express contract is a contract the terms of which have 
l^en spoken or written and agreed to by both partie Jt i 
ri ts ir"" TT ''^ -"t-^-tinction to'implied con! 

AniS '7' ^ '"^'"'"'^ '"^ "°* ^^'^ express words, 
nro^r 7 t '*'"*'^*^* '' ^ '^^"^"■^^t *^t arises where no 

prfce thaf Se £ I" T^' '^ ^^^ '"' ^'^' "^^ -"y 

Sue It .-f f ""ght charge, but at their reasonable 
value. It ,s not necessary that he should promise to pay for 

the law holds that a contract to pay for them at what thev 
the service may claim compensation in court 

rent uT Y u^ '"'P^"' " P""*""'^^ *« P^y ^ reasonable 

thel **7~P'^ ^^^' ^ "^"ning account with each other 
the law considers that they have promised each other that S 
one from whom a balance is found to be due shaU pay tha 

that the party has willmgly taken the benefit of what was done 
If somethmg was done for him without his making any rel 
quest, and without his afterwards making any use of U he 
could not be charged for it ' 

r.n!l' "^'^T '""^"""' ^ "'^" '"^* ^''^^ ^t your door every 
morning, and you used it. the law would imply a promise o^ 
your part to pay for the bread. If he put a n'ew roofTn you^ 
house m your absence without orders, he could not collet for 



64 



CONTRACTS 



It, because you would have to use the new roof whether you 
desired such repair or not. In case the person who performed 
the service intended to do it without claiming payment for it. 
It would be a gift and there would be no implied contract to 
pay for it. 

Note: 

I. It is always most satisfactory to have a distinct 
understanding as to prices for services rendered. 
Even .lawyers, dentists, and plumbers are some- 
times believed to overvalue their services. 

§ 53. Quasi Contracts 

It win require close observation to distinguish implied con- 
tracts from quasi contracts. A quasi contract is a contract 
implied in law from the circumstances and without regard 
to the intention of the party who is bound. For example, 
a man staying at a hotel suddenly dies. The proprietor of 
the hotel calls in an undertaker who takes charge of the 
funeral preparations. The undertaker sends his bill to the 
executors of the man's estate. In this instance there was no 
consent on the part of the man or his representatives, yet by 
law it was unplied that his estate should be bound for the 
obligation, and that there was a quasi contract to that eflfect. 

The following is another case of quasi contract : In Cali- 
fornia a law was passed providing for a certain number of 
pilots to meet ships coming into the bay of San Francisco 
and take the ships in. Each ship was to pay its pilot a certain 
sum. Therefore, if a pilot took the trouble to go out to meet 
a ship and the officers did not wish his services, he would have 
to be paid a sum, if not the full and usual fee, enough to pay 
for his time and trouble in meeting the ship. 



HOW CONTRACTS ARE MADE 



6S 



§ 53. Executory and Executed Contracts 

An executory contract is a contract that has been made 
Dut has not as yet been carried into effect 

.ff ^AT"u''' '"""■^'^ '' *'"" *^t has been carried into 
effect by both parties. A contract that has been carried out 
by one party and not the other would be executory from one 
pomt of view and executed from the other point of view. 

§ 54. Conditions Precedent and Subsequent 

fh. ^r"'^'''°" P''^"<^«"t is something to be performed before 
fte otiier party can be required to do his part. It is some! 

emptoyment it is necessaiy to do the stipulated work before 
there IS any clami for payment. The performance of the work 
IS the condition precedent. (See also §§ 109 no ) 
f™.f TT^^ subsequent is a condition attached to a con- 
tract the fulfilment of which will discharge the obligation 
The simplest instance of this is the purchase of goods wih 
?al,T !^ '?™"^ "^'"^ ^'*'" ^ "rtain number of 

contrt. f 1^°'^' "'' ^'^- " *^ ^"^^ ^'^ '^turned the 
contract of sale is annulled, and the purchaser is not liable 

it^rSdi:' '^ '" '''' '' ^'' ^ ^"^^^^ *° •^^ *^ 

,«,.f f^«^] mortgage is another instance of a condition sub- 
sequent. If the condition is performed and the pavment 
«^cured or made, the chattel mortgage becomes void and the 
person who makes the payment has clear title to the goods. 

§ 55- Void and Voidable Contracts 

leJelli °'. unenforceable contract is one which has no 
legal effect and on that account cannot be enforced. It is not 
necessarily an illegal contract, though an illegal contract would 
DC a void contract. 

A voidable contract is not absolutely void, but it can be 



I 



66 



CONTRACTS 



avoided by one of the parties concerned. A contract with a 
minor can be enforced by the minor but if he does not wish 
to carry it out he can avoid it. (See § 38, "Minors.") 

§ 56. Drafting a Contract 

Where an important contract is to be drawn up, a lawyer 
should be employed. Where the contract involves nothing 
more than a simple sale, a contract of hiring or other ordinary 
busmess transaction, any inteUigent man who knows how to 
use the English language should be able to draw up a plain, 
understandable statement of what the parties undertake to do! 
A chapter in the latter part of this book has been given to this 
subject. (See Chapter XCVIII, "Drafting a Contract") 



Review Questions 



I. 



2, 



Qassify contracts as to grade or ease of legal proof. What is 

the difference between simple and formal contracts? 
How must an oral contract be proved? 

3. What data should a written contract contain ? 

4. What is the Statute of Frauds? What was the object of it? 

By whom must the required memorandum be signed ? Which 
arc the contracts that must be in writing? 

5. Where must written contracts be signed in your state? 

6. In marriage, is the contract a written one? 

7. When is one liable for a debt, default, or miscarriage of another ? 

Does a loan have to be evidenced by writing? 

8. Is an oral contract to sell real estate enforceable ? Give reason 

for answer. 

9. What amount of personal property would require a written con- 
tract for its sale in your state? 

Would a contract to write a book have to be in writing? 

What instruments require a seal? What form of seal is re- 
quired ? What is a contract by specialty ? What is a covenant ? 

Define contracts of record. What is a recognizance? What is 
the object of acknowledgment? 



10. 
la. 



HOW CONTRACTS ARE MADE 



67 



13. What is the difference between express and implied contracts? 

14. What is a quasi contract? 

15. What is the difference between an executory and an executed 

contract? May a contract be executed on one side and 
executory on the other? 

16. What is a condition precedent? What is a condition subsequent ? 

17. What is the difference between a void and a voidable contract? 

If you contracted to rent a house that burned before the tenant 
moved in, would it be illegal? Would it be a void contract? 



CHAPTER VIII 

EFFECT OF CONTRACTS 

§ 57- Illegal Contracts 

What constitutes an illegal contract has been explained in 
§ 39. The point to make is that no contract which is against 
the law or against public policy can be enforced. If the parties 
come into court, both are equally chargeable with knowledge 
of the law and therefore with guilt in breaking it; and the 
court will refuse to help either or to interfere at all. If one 
of them has been defrauded out of his property by inability 
to enforce the contract, that constitutes his punishment for en- 
tering into such a contract Such a party cannot get his 
property back nor can he enforce the contract. 

There is a legal maxim to the effect that "ignorance of the 
law excuses no one/' This seems harsh, but it is rigidly en- 
forced. Therefore, if there is any doubt about the legality 
of a contract, the parties should assure themselves that it is 
in accordance with the law. Ignorance or good intentions 
will not excuse a man if he makes an illegal contract CSee 
also § 59.) ^ 

Sunday Contracts. In almost every state contracts made 
or to be performed on Sunday are illegal, unless they are for 
some purpose of charity, necessity or mercy. To be necessary, 
however, the thing done must be something intended to pre- 
serve life, health or property. 

§ 58* Effect of Mistakes 

There are two kinds of mistakes possible in making a 
contract: 

6B 



EFFECT OF CONTRACTS 



69 



Jl • 



2. 



A mistake as to whom one is dealing with, what the 
agreement is about, or what is to be done under 
the contract. 

A mistake as to the quality or the value of the sub- 
ject the contract deals with, or its legal effect. 

A mistake under the first heading will mean that there is 
no contract. A party cannot be forced to observe a contract 
with someone with whom he did not intend to contract or in 
regard to something he did not consider. The parties must 
be considering the same thing and must be agreed as to what 
is to be done about it, or there is no meeting of their minds 
and no contract. 

If, however, there was no mistake as to the parties, or as 
to what the contract was about or what was to be done the 
fact that either or both of the parties believed that the subject 
of the contract was more or less valuable than it actually was 
will not make any difference as to its binding effect. An 
agreement has been made and they will be held to it even 
if it means loss to one of them. 

Neither will it make any difference if either or both of the 
parties did not realize that he would be bound by the contract 
or did not know just what he was required to do under the 
law to carry out his agreement. Every man is supposed to 
know the law, and it is his own fault if he failed to find out 
about it in the first place. 

If a person knows that the instrument he is signing is a 
contract, and fails to read it, he will be bound by it even though 
It is a contract to do something entirely different from what 
he intended. No one should ever sign contracts without read- 
ing them. 

In case, however, through the fault of some clerk in writ- 
ing the contract an error of some sort gets into the written 
document so that it misrepresents the actual agreement be- 



i 



70 



CONTRACTS 



tween the parties, the court will order it rewritten to express 
what they really agreed upon. That is, a clerical error wiU 
be corrected. 



Note: 
I. 



The terms of a contract should be written down 
clearly and in simple language. Both parties 
should then read them over, and any questions 
that arise should be cleared up before signing. 
Much trouble and litigation would be saved if 
this course were followed in all cases. 



§59. Effect of Fraud 

If there is any fraud in inducing a party to enter into a 
contract, he may refuse to perform his share of the agreement. 
If the contract is already carried out, he may recover his 
property or its value. If he wants to annul the contract, how- 
ever, he must return anything he has received under it unless 
it has been used up or destroyed at the time he discovers the 
fraud. If he prefers, he may let the contract stand and claim 
damages for any loss he may have suffered. 

What Constitutes Fraud, If any false representation is 
made by a person who knows it to be false or has no positive 
belief or adequate knowledge in regard to the matter, intending 
to induce action and to create a false impression in the other 
party's mind, or to prevent him from investigating to find out 
the truth about the transaction, it amounts to a fraud. Mis- 
statements about unimportant matters, or mere expressions of 
opinion in recommending an article for sale, do not affect the 
contract The buyer must be on his guard against overstate- 
ments of opinion by the seller as to the virtues of the article 
he is selling. Overstatements are to be expected everywhere. 
When a party relies on the opinion of an expert, however, 
or when he seeks advice from a person in whom he has a 



EFFECT OF CONTRACTS 71 

right to repose confidence, such as a father, a guardian or an 
. attorney, it is a different matter. Then an expression of 
opinion without sound grounds would amount to fraud 

If the reading of a contract be dispensed with as the result 
of fraud, the injured party may refuse to live up to the terms 
of the contract, or he may claim damages for the injury sus- 
tamed. This rule holds good also whenever the legal effect 
of the contract has been misrepresented or when a fraudulent 
value IS placed on that which is being bought or sold. 

The injured party must act promptly as soon as he dis- 
covers the fraud. By delay he may lose his rights, since he will 
be considered to be content with the terms of the contract. 
Taking advantage of another person's mistake is fraud 
In Shelton v. Ellis, Shelton & Co. learned of a mistake in 
the rate sheet of the Western and Atlantic Railroad Company 
by which the fare from Atlanta, Ga., to Rogers, Ark., was 
quoted as $21.25 when it should have been $36.70. They in- 
duced Garland, a traveling salesman, to buy a large number of 
tickets for them before the railroad company discovered the 
mistake. The court held that the tickets must be returned.^ 

If any part of the representations which induced the other 
party to enter into the contract was fraudulent and had any 
effect m inducing him to agree to it, the fact that most of the 
representations were honest will not make the contract good 
But if the fraudulent representations referred to matters of no 
consequence and were not material to the contract they will not 
affect It. Also, if the other party relied on his own judgment 
m the matter, rather than upon what was told him, the f raudu- 
lent misrepresentations will make no difference. 

What Fraud Will Nullify a Contract. Fraud in any of the 
negotiations leading up to a contract will nullify it If fraud 
has prevented the party from making an independent investi- 
gation^or if it has led him astray in regard to the facts, it will 

* 70 Ga. 397. 






72 



CONTRACTS 



make the contract void. Fraud not connected with the im- 
mediate contract but with previous negotiations will not affect 
the present contract 

Specious Schemes. Ordinary people of the salaried and 
the professional classes lose money running up into millions 
of dollars by investing in aU sorts of specious get-rich-quick 
schemes. If they would study the prospectuses of these 
schemers, they would see how carefully they are written so as 
to avoid any positive statements but to give a strong impres- 
sion by a series of carefully worded opinions, estimates, etc. 
Such phrases as, "it is estimated," "it is expected," "there is 
every reason to believe," "it is the opinion of old miners," 
are used again and again. It is astonishing how plausible a 
prospectus can be made without giving any positive statement, 
except as to comparatively immaterial matters. The important 
matters in deciding upon an investment are: 

1. The character and the experience of the manage- 

ment 

2. The amount of capital there will be available. 

3. The subject matter of the business. 

On these essential points there is rarely any positive in- 
formation in prospectuses of this sort. 

Note: 

I. Consult your own lawyer or banker before investing 
money. 

§ 60. Duress 

A party must consent to a contract of his own free will. 
That is the essential element of an agreement. Consequently, 
if his will is overpowered by that of someone else, the result 
cannot be a contract that will hold him. 

There are two ways in which a person may induce another 
party to make a contract against his own free will. One is by 



EFFECT OF CONTRACTS 



73 






the use of intimidation or force, the other is by taking ad- 
vantage of mental weakness or of affection to influence him. 

If a party signs a contract in order to escape from im- 
prisonment or detention of some kind, he has signed under 
duress and not of his own free will and the contract cannot be 
enforced. If he signs it in fear of immediate bodily harm, 
which he has every reason to believe the other party is capable 
of inflicting, the same holds true. In a case where there is no 
detention but merely threats, the threats must be either of 
bodily harm or of imprisonment to the person himself or to 
some member of his family, or of an injury to his property, 
and must have been made under such circumstances that a man 
could reasonably believe that there was immediate danger of 
their being carried out 

As soon as a party escapes from duress or from fear of the 
threats that coerced him, he may rescind his contract and re- 
cover any property or other consideration, or value therefor, 
that was taken from him under the contract 

§61. Undue Influence 

Undue influence is when one party takes advantage of 
another through near relationship, such as that of attorney and 
client, doctor and patient, guardian and ward, etc. ; or when the 
second party is mentally weak and at the mercy of his more 
keen-witted fellow men. A deficient person can hardly be said 
to exercise his own free will; contracts can readily be imposed 
upon him by others, and when this imposition can be proved, 
contracts made with him have no legal standing. 

When a person takes advantage of mental weakness, or of 
near relationship, or of confidence reposed in him to influence 
another person to make a contract, it is not the free action of 
the second party and is no contract. People who are merely 
friends are not considered to be in such a position that the one 
can exercise an undue influence over the other. Where the 



74 



CONTRACTS 



a suspicion of undue influence. 

If die person recovers his mental health, or is senaratw! 
from the party who influen«d him. he may "fu e to ca ^ 
o^ bs contract and recover anything he has tunied over to 
the other party under it. 

His friends and relatives may also act for him in order to 
protect his property while he is still under the inZce of the 
other party, or too incapacitated mentally to act for h7mif 

Note: 

1. No contract is of any value unless it is made by the 
free and unbiased will of both parties. 

§ 6a. Law as to Alteration 

Any alteration in a written contract by one of the oarties 
without the consent of the other, makes'the contra^ 'i" 
effect as against the other. 

The parties to a contract may alter it if they can agree on 
^e changes to be made. If it is a written contract, one of th^ 
parties may make the alterations in the contract itself with the 
consent of all the other parties, or the parties may m kTa „ t 
wntten contract If parties attempt to modify a written con" 
for I H-^." or^^ agreement there must be a new consideration 
for t distinct from that of the original contract, so that in 
effect a new and oral contract has been made 

mJ 1^,1^''^^^^«^ I^ Ae same parties make a new agree- 
ment about the same subject which is entirely inconsistent with 
the old agreement, the old agreement will be regarded as set 
aside by the new. If, however, there is any part of it which 

L^f^rTf '"^, with the new, that part still remains en- 
forceable. ( See also § 69. ) 

If one of the parties to a contract makes alterations in it 
witiiout the consent of the other parties to it, this amounts 
to fraud, and the contract becomes unenforceable by the guilty 



EFFECT OF CONTRACTS 



75 



party. If a person, not a party to the contract, and not acting 
for any of the parties to it, should make alterations in it, 
they would be treated as though they did not exist. The nature 
of the original contract could be proved by the testimony of 
the parties, and the contract would be enforced as it stood 
before the alterations were made. 

Filling in a Contract If the contract is not complete, how- 
ever, but blank spaces have been left for any of the terms to 
be filled in later, any party to it to whom it is entrusted may 
fill out the blank spaces in any way which would be consistent 
with the other terms of the contract and enforce it as he has 
made it. If he were given instructions for filling it out, he 
himself could not enforce any other contract than one that was 
in accordance with the instructions, but he might fill it out 
contrary to the instructions and transfer it to another party, 
who, knowing nothing of the instructions, would be entitled 
to enforce it as he received it. This question arises more often 
in the case of negotiable instruments and will be spoken of 
under that heading. (See § 161.) 

Notes: 

1, The best way to change an existing contract is to 

make a new written agreement signed by all the 
. parties. 

2, A new contract may be made by letters if they point 

out clearly what the new agreement is. 

3, It is not safe to leave any writlen instrument with 

unfilled blanks. 

§63. Interpretation of Contracts 

A contract should be so clear that its meaning may be easily 
understood. As a matter of fact, many contracts are far 
from clear and all sorts of disputes arise over their meaning. 
A contract should be interpreted so as to carry out the in- 
tention of the parties as nearly as may be. TTie court will 



76 



CONTRACTS 



^ A «™. .a, ^ r;,:- :;tr„r.: r;,n; 

the state where it was entered into. we law ot 

. fc getting at the intention of the parties where the contract 
js not dear, anything which is unessential and tends to conS 
the meaning will be disregarded. If there are two statemen I 
which absolutely conflict, the court will considerXleT 
gives the true meaning and will disregard the latter 

The parties may bring in evidence to show the meaning 
of any technical terms which were used Jtr.T "'^^"'"^ 
wpII T^r^^: A . • °^ *° prove some 

weU-recogn.zed custom or usage of business which will explain 

Srt ofT"^ "l "'■*"° ''^'- °' ""*=^ ^y ^ consider d 
part of the contract. 

tnese will be read in connection with it. 

/?«/^.y /o Ascertain Meaning of Contracts. There are cer- 
tain general rules which the court will always follow to get 

\?l TT"^ ""^ ^ '^"*'^"*- ^^ ^^ that in a printed form 
which has been filled out, if the written and the printed wor^ 
are inconsistent, the court will disregard the printed words 
and follow the written ones. If any words or phrases are 
inconsistent with the rest of the contract, and a clear intention 
can be gathered from the rest without them, the court will 
treat them as surplusage. 

^^ If a general term is used, such as an agreement to do the 
mason work on a building, and it is followed by the mention 
of any specific kinds of mason work, such as "stone and brick 
work, plastering, 'etc., it is a contract to do only the special 
kinds of mason work mentioned and not all the mason work 
on the building. In order to make a general contract for all 
the mason work, this intention should be clearly stated 

If any of the terms of a contract were intentionally made 
ambiguous by one of the parties for the purpose of taking 



EFFECT OF CONTRACTS 



77 



advantage of the other party, the court will interpret the 
doubtful terms in the way that will least favor the party at 
fault. 

In trying to decide what the parties intended where the 
meaning is doubtful, the court will be influenced by the words 
and the acts of the parties at the time of making the agree- 
ment, or the manner in which they have carried it out since. 
Their manner of carrying out the conditions shows what they 
understood by the agreement. 

Notes: 

I. A contract should always be stated in the simplest 
and most intelligible language possible, and the 
parties should go over it carefully to make sure 
that all of the terms are clear. 
If it be desired to make it with reference to some 
particular business custom, it would be well to 
mention that custom in the contract so that there 
can be no doubt that both of the parties under- 
stood that it was to be part of the contract. 



mm 



Review Questions 



I. 



2. 



Is the rule in regard to ignorance of the law just? Why is it 
enforced? What is the law in your state in regard to Sunday 
contracts ? 

Explain the distinction between mistake of party, subject matter 
or obligation, and mistake of the quality, value, or legal effect. 

3. What is the effect of signing a contract without reading it? 

If the party had dispensed with reading because of fraudulent 
statements of the other party, would that affect the situation? 
What is the effect of a clerical error? 

4. Broadly, what is the effect of fraud on a contract? What is 

fraud ? 

5. Distinguish between misrepresentation and expression of opinion. 

When is the expression of opinion liable to be fraudulent? 



78 



CONTRACTS 



7 Sr/rS'".*"'' '^'"'°'"^' °* '"°"'*' P''^"''^ "intake? 

^' wi«1^,'?K "P'^^'«="'°"» »>-«>» "ake a contract void? 
What are the exceptions? 

& How are proq^ctuses worded to avoid open fraud? What are 

„ WK ! ]■"* .T"" P"'"'* •" »"y proposed investment? 

9. Wha does duress" mean? What is its effect on a contract' 

^V "T* ^ """""' •"""'"""• What is iu legal effect 
on a contract? * 

"■ ^aif *' "* f" *V"fr« "^ ~"'"^'^ What is the best way 
to alter a contract? Why? 

It wkT "' l^'^'ir'"'^ °^^^ ^»»« interpretation of contracts. Why> 

It rt \f" """T "' ''' ""^^^ '"^ interpreting contracts? "^^ 
14. A bought a cash register on the statement that it would save 

AfUT"l' 1 ^ ^^^^^P^' ^d one-half of the clerks' time. 
After a short time he alleges that the statement was false 
and seeks to rescind the sale on the ground of fraud. Was 
this fraud, or statonent of opinion, and what is the result? 



CHAPTER IX 

ASSIGNMENT AND NOVATION 

§ 64. Assignment of Contracts 

A contract which calls for personal services cannot be 
assigned by either of the parties to it. No one can be com- 
pelled to work for a person unless he agrees to it; and no 
one can be compeUed to have another working for him whom 
he did not choose, and these conditions would result if sucli 
contracts could be assigned. 

A contract which depends on the skill, ability, or trust- 
worthiness of one of the parties to it cannot be assigned by 
that party, but may be assigned by the other party. For 
example, a contract to write a poem cannot be assigned by 
the poet, but may be assigned by the publisher. 

The rights in any other contract may be assigned by either 
of the parties to it unless there is something said in the con- 
tract to forbid it. A party may assign a contract by simply 
handing the written contract over to the party to whom he 
assigns it, or by informing the other party to the contract by 
word of mouth that he has given up all his rights under it to 
the person to whom he wishes to assign it. 

Where the party desiring to assign a contract is under 
obligations under the contract, he cannot assign these without 
the assent of the other party to the contract (see § 65, "Nova- 
tion") ; otherwise he would still remain liable for whatever 
he had bound himself to do or to pay in the contract. 

Form of Assignment, The proper way to assign a con- 
tract is in writing, usually on the back of the contract, if it is 
in writing, or if it is an oral contract, by a written assi^ment. 

79 



8o 



CONTRACTS 



In the case of contracts under the Statute of Frauds, the law 
requires the assignment to be in writing. No particular form 
of words is necessary if the intention to transfer all the rights 
in the contract is plain. (See Chapter C, Forms i8 and 19.) 
_ Liahhhcs of the Assignee. A person to whom a contract 
IS assigned by one of the parties becomes liable to perform 
aU the duties of the party who assigns the contract He re- 
ceives only such rights as the original party enjoyed under 
the contract If the contract was obtained by fraud, duress 
or undue influence, or the other party to it was not competent 
to make a contract, such other party may refuse to perform 
It just as much as though the assignee were one of the original 
parties. ^ 

If the party who assigned the contract owed the other 
party anything which could have been offset against the con- 
tract, the other party may offset that amount against the 
person to whom the contract has been assigned. 

Rights of Assignee. If a party should assign all his rights 
under a contract to one person and afterwards assign them 
to another, the second person would get no rights under the 
contract If the party assigned only part of his rights to 
the first person, the second person might enforce such rights 
as remained. The second person would be entitled to sue 
for damages the party who claimed to assign the contract 
to him. 

Subject to the rights of the other party, the person to 
whom a contract has been assigned may bring a suit to enforce 
It m all cases where the party who assigned it to him would 
be entitled to do so. In some states, if he sues in a court 
of law, he must bring his suit in the name of the person who 
assigned the contract to him. He may sue in a court of equity 
m his own name. In a case where there have been several 
assignments, the suit must be brought in the name of the party 
who gave the first assignment 



ASSIGNMENT AND NOVATION 



81 



A person to whom a contract has been assigned should 
notify the other party to the contract at once that the rights 
under the contract have been assigned to him. If there has 
been an assignment to any other parties, the one who is the 
first to give this notice will be entitled to have his rights en- 
forced first. Then, too, it prevents the other party from pay- 
ing out anything to the person who has assigned the contract 
If such payment has been made in ignorance of assignment, 
the party to whom the contract has been assigned could not 
compel payment again to himself. 

Notes: 

1. All contracts which do not involve the personal 

element may be assigned unless prohibited by the 
law or by public policy. 

2. Any form of assignment which cuts off all control 

of the assignor over the contract will be sufficient 

3. The assignee takes aU the rights which the original 

party had in the contract, and the contract is sub- 
ject to all the defenses which have arisen prior 
to its assignment 

4. The assignee should always give the other party 

prompt notice that the contract has been assigned 
to him. 

§ 65. Novation 

Novation is the substitution of other parties, or another 
party, for one of the original parties to the contract. 

Where John Smith has an agreement with Henry Jones 
to buy a horse for a certain sum, and instead of doing so he 
assigns the contract to Samuel Brown, and Henry Jones agrees 
to take Samuel Brown as party to the agreement, this is a 
novation. Samuel Brown has been substituted for John Smith 
in the contract, which can now be enforced against him, 
Samuel Brown. 



82 



CONTRACTS 



Agreement of ParHes. In order to constitute a good 
novation, all the parties must agree to the arrangement. Henry 
Jones must discharge John Smith from his agreement to pay 
for the horse, and take Samuel Brown's agreement in place 
of It; John Smith must have assigned all his interest in the 
contract to Samuel Brown, whose agreement to pay for the 
horse is the consideration for Henry Jones's acceptance of 
him as a substitute for John Smith, If any of these considera- 
tions are lacking, the novation will not be enforceable. 

In Ford V. Adams,* Jacob Schyer owed Ford some money 
He gave a written order to Adams, who owed him, Schyer 
to deliver 40 cords of wood to Ford. Ford accepted the 
substitution. Adams did not deliver the wood, and Ford 
sued him for it. The court said that there was not a good 
novation, because it was not shown that Schyer had released 
Adams's debt to him, and without that there would be no 
consideration to Adams for his promise. 

Notes: 

1. To constitute a good novation, the other party to 

the contract must accept the substitution and must 
release the party making it from his obligation 
to him, 

2. The party making the novation must assign to the 

new party all his interest in the contract. 

3. All of the parties must accept the new arrangement. 

Review Questions 

1. Why cannot a contract for personal services be assigned? 

2. Can a written contract be assigned orally? 

3. Write an assignment of a written contract. 

4. What does the assignee of a contract have to do? 



ASSIGNMENT AND NOVATION 



83 



5. What rights would an assignee have? Can an assignor relieve 

himself of his liability under a contract by making an assign- 
ment? 

6. Why should an assignee notify the other party to the contract 

promptly ? 

7. What is novation? How many parties to a novation? 

8. Distinguish a novation from an assignment. 

9. Write an assignment of an account. 



^ a Barb. (N. Y.) 349. 



CHAPTER X 

DISCHARGE OF CONTRACTS 
§ 66. Discharge by Perfonnaiice 

The usual way to discharge a contract is by performance 
or fulfihnent This means performance by both of the parties. 
Performance by only one of the parties releases that party 
from liabiKty on the contract, but does not discharge the 
contract or release the other party from his obligation. 

Under the old common law rule, the performance must 
be strictly in accordance with the provisions of the contract. 
This has worked so much hardship and real injustice that 
equity has modified the doctrine, and allows a substantial per- 
formance with damages to compensate the other party for 
any loss he has sustained 

Substantial Performance in Construction Contracts. If 
the variations in performance of an agreement were inten- 
tional, they would amount to breach of the contract. Where 
they were not intentional, the other party is entitled to deduct 
from the price the value of any such omissions as there may 
have been, and to have them repaired himself if he desires. 
This rule applies especially to construction contracts, and even 
in an action at law substantial performance will be sufficient. 
In Heckman v. Pinkney, Heckman had a contract to do 
the carpentry work on a house that was being built for Pink- 
ney. He failed to make cornices and to put centerpieces in 
some of the rooms according to the agreement; and the 
material for deadening the floors did not have hair in it, as 
had been stipulated. The court said that the variations were 

84 



DISCHARGE OF CONTRACTS 



85 



not intentional or material, and that the contract had been 
substantially performed.* 

At law, time is of the essence of a contract; that is, 
performance must be within the time specified, or the party 
guilty of delay will be liable for damages for non-performance. 
If, however, the injured party accepts performance after it 
is due, he must pay the fair value of what is done, though 
he is allowed to deduct damages for the delay. 

In equity, time is not of the essence of the contract unless 
it has been expressly agreed that it shall be. That is, a court 
of equity will often enforce the contract in favor of the party 
who has delayed, unless in fact or by express agreement failure 
to perform on time amounts to failure to perform at all. 

Where the parties agree that the contract must be per- 
formed to the satisfaction of one of them, nothing which 
does not satisfy him will be performance. At the same time, 
he must be honest about his dissatisfaction and not pretend 
to be dissatisfied when he is not really so. Sometimes there 
is an agreement that the judgment of a third person shall be 
the test as to whether the contract is performed or not. In 
such case, the contracting parties must abide by his judgment, 
unless he is mistaken or fraud is shown. 



Notes: 



I. 



2« 



Performance must be substantially in accordance 
with the terms of the contract. 

Where time is material to the contract, the per- 
formance must be within the time set. 

Where the parties agree that the performance must 
be to the satisfaction of one of them, or to the 
satisfaction of a third party, the honest judgment 
of that party is the test of whether or not the 
contract has been performed. 



«8i N. V. aii. 



86 



CONTRACTS 



i 



§ 67. Discharge by Agreement 

. An agreement between the parties to rescind a contract, 
or a later agreement between the same parties with regard 
to the same subject matter, the provisions of which later agree- 
ment are inconsistent with the contract, will discharge the 
original contract. 

The agreement to rescind the contract must, like all other 
agreements, conform to all the rules governing contracts. The 
release of one party from his obligations is the consideration 
for the release of tht other from his. But, where one party 
has performed his part of the contract, there must be some 
new consideration to him for releasing the other, or the agree- 
ment to rescind will not be enforceable. 

There is only one case in which the parties may not agree 
to cancel a contract, and that is when it was made for the 
benefit of a third person and the third person has notified 
them that he accepts it At any time before he accepts they 
may declare the contract void. For instance, a farmer might 
come into town and tell a storekeeper to send away and get 
a suit of overalls for his hired man and he would pay for 
them. He informs the hired man of what he has done and 
the hired man tells the storekeeper that he will call for the 
overalls when they are expected. At any time before the hired 
man told either the farmer or the storekeeper that he would 
take the overalls, they might have cancelled the contract, but 
not afterwards. In all the states, with the exception of Massa- 
chusetts, Michigan, New Hampshire and Vermont, a third 
person may maintain an action for the breach of a contract 
for his benefit 

If two parties to an agreement make a new agreement 
about the same subject matter which is inconsistent with the 
old agreement in any way, the old agreement will be dis- 
charged to that extent. For instance, in an agreement of 
novation (see § 65), by accepting the substituted party, the 



DISCHARGE OF CONTRACTS 



87 



2. 



Other party discharges the party making the novation from 
his obligations under the contract 

If the parties put an oral agreement into writing or instead 
of a written agreement make a new contract under seal, 
the old contract is discharged and they are bound only by 
the new agreement. 

Notes: 

I. The parties may agree together to rescind a con- 
tract, except that where it was made for the benefit 
of a third party, they may not rescind it after he 
has given notice of acceptance. 
A later agreement, between the same parties and 
with regard to the same subject matter, the terms 
of which are wholly or partly inconsistent with a 
prior agreement, revokes that agreement so far 
as it is inconsistent with it 
An oral agreement is superseded and discharged by 
a later written agreement, and a contract in writ- 
ing but not sealed is superseded by a sealed in- 
strument. 

§ 68. Discharge by Various Other Causes 

Operation of Law. A contract may be discharged by the 
operation of law. When a contract is discharged by the 
making of a new written or sealed contract, as has already 
been explained (§ 67), it is discharged by the operation of 
the law which declares that a written instrument is of greater 
value than an oral agreement, a sealed instrument than a 
written contract. When a person goes into bankruptcy, the 
law discharges all of his contracts with a few exceptions. 

Impossibility of Performance. There are some cases in 
which impossibility of performance discharges a contract. If 
it were for some particular article which could not be replaced 
and the article were destroyed, or if it were a contract for 



3. 



88 



CONTRACTS 



personal services and the person to render the services became 
ill or died, the contract would be considered discharged, and 
there would be no liability for damages. The parties are 
considered to have realized that if such a thmg were to happen 
the contract could not be performed, and to have made the 
contract on the understanding that it would be carried out 
only in case the article were in existence or the person were 
able to perform at the time. If the one party to a contract 
by his acts made performance impossible, it would discharge 
the other party from all obligation. Contracts for the pay- 
ment of money are not discharged by the death of either party, 
but contracts involving personal skill, trust or confidence be- 
tween the parties are discharged by the death of one of die 
parties. This does not, however, apply to contracts which 
can be carried out by the executors of the deceased, such as 
to have a house built or painted. 

Act of God. Where the performance becomes impossible 
by what is known as an "act of God," that is, a tornado, a . 
hurricane, a flood, a conflagration, or some other accident 
or disaster amounting to a public calamity, the contract is 
discharged. Ordinarily a person takes the risk of the contract 
being impossible to perform if he does not make some provi- 
sion for it in the agreement, and impossibility of performance 
is no excuse. 

In the case mentioned in § 41, where the subject matter 
was destroyed at the time the contract was made, if one of 
the parties knew of it, he will be held liable for a breach of 
the contract, notwithstanding that it is impossible for him to 
perform it. In the case of a contract where one of the parties 
promises to do one of two things, if one of those things was 
impossible at the time the contract was made, he must perform 
the other. 

In Case of War. When two countries go to war, all 
possibility of friendly relationship between them ceases. All 



I 



11 



f 



k 



DISCHARGE OF CONTRACTS 



89 



contracts between their citizens on which nothing has yet been 
done are discharged. If anything has been done by either 
party under a contract, and it is possible to do so without 
injustice to either party, the contract will merely be suspended 
until the war is over, when it must be carried out fully in 
accordance with its terms. 

Effect of Strikes. A contract may provide in itself that 
it is to be discharged on the happening of certain conditions. 
It is very common to provide against strikes, etc., in this way. 
The provision, however, must be in the body of the contract 
to be good. A notice at the top of the firm letterhead that 
all sales were to be subject to strikes or accidents would not 
form part of a contract written under such letterhead. 

As a general rule, printed conditions on a letterhead are 
not binding on the party receiving the letter. If any matter 
is important it should be written in the body of the letter. 

Lapse of Time, Any contract is supposed to be performed 
within a reasonable time. Even if no time for performance 
be given in the contract, it will nevertheless be discharged if 
a long period of time goes by without anything being done 
on it by either party. 

Offer to Perform. If due performance is offered by one 
party and is not accepted by the other, the first party is dis- 
charged. 

Notes: 

Contracts may be discharged: 

I. By the operation of conditions agreed to by the 
parties. 
By merger or alteration of a written instrument, 
or by the discharge of the party in bankruptcy. 
By lapse of time if delay is unreasonable. 
By an offer to perform, if it was refused by the 
other party. 



2. 

3- 
4. 



; 



90 






6. 



CONTRACTS 

By impossibility of performance, where the im- 
possibility is caused by the act of the other 
party; by the operation of law; by a declara- 
tion of war; or by the destruction of the subject 
matter where the contract concerned a par- 
ticular article or was for personal services; but 
not otherwise. 

In making contracts to handle orders, to carry 
on construction work, etc., involving large 
amounts, where there is a possibility of strikes 
and various labor disputes preventing the finish- 
ing of the work at all, or at least within the 
tune hmtted by the contract, parties should 
always provide against such delays. It is 
usually safe to have a fire clause, and to pro- 
vide against destruction by floods, tornadoes 
etc. ' 



DISCHARGE OF CONTRACTS 



9t 



Review Questions 

^' ^^ '* ""^^ ^ *^ discharge of a contract? 

2. What IS meant by substantial performance > 

3. What is the rule as to time of performance, at law? In equity? 

,n W Vr" "','"'"'" performance to the satisfaction of 
an interested party? 

5. What is meant by "discharge by agreement"? 

6. If one party had performed his part of the contract, could the 

parties agree to rescind? What element would be needed 
legally to rescind a contract? 
« ^^* .efff t does the interest of a third party have? 

than the old contract? ^ 

lo I^!I •M'" f'"* "/ '^■^"'Pt'y on pending contracts? 

10. What IS the effect of impossibility on a contract? What is the 

situation when a contract becomes impossible but the contract 

IS not discharged? 



la. 



13 



II. In what cases does impossibility discharge the contracts ? What 
kinds of contracts are discharged by the death of the party 
to perform? 

What is the effect of specifying certain causes as operating lo 
discharge the contract? 

A father conveyed land to his son on his son's covenanting to 
pay an annuity to his mother on her widowhood. May the 
mother maintain an action, not being a party to the covenant ? 

14. B orally requested A to do certain carpentry work around his 

house in the nature of repairs. B died. A subsequently 
performed the work and brought suit against the administra- 
tors for the price. Can he recover? If so, why so; if not, 
why not? 

15. Does outbreak of war nullify contracts if it simply changes 

prices ? 

16. What is the effect of lapse of time and non-performance ? 

17. If one party offers to perform and the other party does not 

accept, what is the effect as to each party? 



ENFORCEMENT OF CONTRACTS 



93 



I. 
2. 



CHAPTER XI 

ENFORCEMENT OF CONTRACTS 
§ 69- Breach of Contract 

The obligation of a contract is an obligation created and 

The h ^^^^^^"f /'^ <=^"^^--^ from all other branches of lavv 

possible to the intention of the parties, and all the rules of 
imerpreting contracts go back to this fundamental pHndpIe 
and are controlled by it* p""i.ipic 

Failing to perform the contract. 

Refusing to perform the contract. 

3- Making it impossible for himself to perform the 

contract, or denying that there is such a contract. 

Faaure to Perform. If a party breaks a contract by fail- 

»g to perform it, the other party must have done all that can 

to b37 > t'^J"" ""•^"' *' '=°"*^"*^ '^^^■•^ "^^ « -"titled 
to bnng suit If h.s part of the contract was to pay after the 

If a party was to perform work or to deliver goods for 
which the other party was to pay, he must be able to show 
that he has either performed or offered to perform the work 

hejias^ny nght to claim damages. A party must remain 

'Eocyc. Brit., iitb Ed., VoL VII. page 38. 

92 



ready and willing and in a position to perform what he agreed 
during the entire time of the contract; it is not enough once 
to have made the offer. 

It is often hard to determine just when a contract has 
been broken by failure to perform. Unless the time within 
which it was to be performed was an important part of the 
value of the contract, the courts usually give parties what 
they consider a reasonable time in which to complete it, 
whether the contract sets a definite time for its completion 
or not. 

A Reasonable Time. The difficulty is to know what the 
court will consider a reasonable time. The parties may, how- 
ever, have this determined beforehand by stating in the con- 
tract that "time is of the essence (that is, an essential part) 
of this contract," in which case the court will enforce it 
within the time specified. Or, if this has not been done, the 
party for whom the services were to be performed or to whom 
the goods were to be delivered, etc., may demand that the 
other party fulfil his part of the contract within a certain 
time or he will consider it broken. If he has really given the 
other party a reasonable time, he will have a right to bring 
action if the services agreed upon have not been performed 
within that time. 

A party is always allowed until the last minute of the 
time set to perform, and the day on which the contract was 
dated or the demand made will not be cotmted as a part of 
that time; for instance, if the contract was dated or the 
demand made on July i, giving him 30 days in which to 
perform the contract, the time will not be considered to have 
expired until midnight of July 31. 

Refusal to Perform. If a party refuses to perform the 
conditions of the contract when the time comes for per- 
formance, he also relieves the other party from further obliga- 
tion and gives him an immediate right to sue for damages. 



94 



CONTRACTS 



ENFORCEMENT OF CONTRACTS 



95 






If a party refuses to carry out a contract before the time 
for Its performance has arrived, in some states the other 
party has a right to regard this as final, but in the other states 
he must wait until the time for performance has passed before 
nc IS entitled to bring suit 

When a party notifies the other party that he does not 
intend to perform his part of the agreement and tells him 
to stop work on it. the latter, if he accepts the noUce, should 
stop work immediately. He may. if he prefers, however. 
Ignore the noUce and treat the contract as still existing by 
contmmng to perform his part, though he may not coUect for 
work performed after notice. 

Denial of Contract If a party denies that there is a con- 
tract, or makes it impossible for himself to perform it by 
disposing of its subject matter in some way, the other party 
IS immediately relieved from all obligations and has the ririit 
to sue at once for the damages he has sustained. 

Nates: 

I. Refusal to pcrfonn a contract is a breach of the 

contract 
Making it impossible for one's self to perform a 

contract is a breach of the contract. 
In either of the cases cited above, the other party 

may abandon the contract and sue at once for 

damages. 

Failure to perform one part of a divisible contract 
is not a breach of the entire contract, and does 
not excuse the other party from performance of 
the rest. 

In case of a breach by failure to perform, the other 
party must show that he has performed his part, 
or was ready and willing to do so, before he can 
claim damages. 



2. 



5. 



6. Where a contract has been partly performed by one 

party, the other party must carry out his part of 
it, unless the first party has refused to perform 
further, or the circumstances are such that he 
would not be able to perform the rest of it. 

7. The party who broke the contract must be paid the 

reasonable worth of what he has done on it, unless 
his breach of it was wilful or the contract pro- 
, vided that he should have nothing unless he per- 

formed the whole. 

§ 70. Remedies for Breach of Contract 

The party who is injured by a broken contract may either 
(i) sue for damages, or (2) he may abandon the contract 
and sue for the value of his services or of the goods furnished. 

The moment a contract is actually broken the other party 
has a right of action for damages, but there must be an actual 
breach. People are inclined to rush into court when they 
think that their contract rights are disregarded, without stop- 
ping to make sure that there has actually been a breach. 

When parties to a contract agree on the amount that shall 
be paid in case of breach or default, such amount is called 
liquidated damages. The plaintiff in an action for breach 
of contract can sue only for profits proved to have been lost, 
and not for estimated profits lost. The jury would judge the 
amount of his actual loss from the evidence submitted. 

Action for Breach of Contract. If an action for breach 
of contract is to be brought at all, it is best to do it as soon 
as possible after the contract has been broken, as the court 
may consider that a person has voluntarily surrendered his 
right if he waits too long, or possibly something may happen 
that will excuse the other party from performance. But there 
is one class of contracts in regard to which a great deal of 
care must be taken when bringing suit; these are contracts 



9^ 



CONTRACTS 



I 



li 



."«"otr„"r "^"^/P^'^^ -«-'y separate irom and hav- 
ing no connecbon with each other. If it is perfecUv clear 

XS oi:roT^'' ^"^ -^^' "- ^ rfg^tttuet: 

riX ,. t. ^^^ P*"^" *' «"" without affecting his 

ofwarir "■"' '' *^ ^°"^'^'=*- ^- instance, a bfeal 
ftat warSit'" T*'''' "''"^'^ ^^'^ ^ "^' '« damages for 
c^ntrTcr^ °"' "" ^^ "^^ ^'^^^""S the rest of the 

of th'e parttTdreXr ^art^haf '"^^^^^ t' °"^ 
from wLf hoc K J \^ P ^ "^^ received any benefit 

W'Aen specific Performance Can Be Had. There are 
some excepuonal cases in which an action for damages would 

sons"of''?ule\f '^'"' """• "'^"'^ ^^^^ -■* Ae two 

wfdith fof^f I" *^J^' "^ °^ *^'^ f^^^er until 
IMS death for $2 a week. They later notified her that thev 

refused to perform the contract The court said that it loulj 

be impossible to compute the damages with any certainTv as 

t^-sT:lr^U^1r. "^^ '^"^ of'judgTSac ! 
Z^r^Si """^^ f"'^""'' •^•^"'P^' *^ t^o sons 

forZL.") "^^ ^^"^ ^ ^^' "^P^"'^*^ ^''- 

Instalment Contracts. But in contracts for Jncf 
which are to be j^rformed by instalments, su«i as a co^raS 
to^r I.OOO barrels of oil at the rate of loo barrel? a 

nJ^SbM'- "*• ""-^ ^"^ <™' ""•"«». befor. tie Wgl co.. „, «„•„, b««.e 



ENFORCEMENT OF CONTRACTS 



97 



) 



month until the contract is completed, it is not perfectly clear 
whether a failure to deliver one lot of lOO barrels would be 
a breach of the whole contract or not. The courts in the 
various states hold different views on this question. If a 
party brought an action for damages at once, he might find 
himself cut off from any further damages in case of the other 
party's failing to deliver the rest of the oil; or if he treated 
the contract as broken he might find himself the one guilty 
of breaking it. The only safe thing to do in these cases is 
to consult a local lawyer. 

When a contract is to be performed to the satisfaction 
of a party thereto or of a third person, such as an architect 
or an engineer, the work must satisfy the person designated, 
but, as a general rule, the court will hold him to what it 
considers reasonable. 

Breach by Failure to Perform. A breach by failure to 
perform does not usually take place until the time for per- 
formance has passed. However, in contracts where goods are 
to be paid for in instalments, or rent is to be paid by the 
month, if the contract is an entire and not a divisible con- 
tract, failure to deliver one instalment or to pay one month's 
rent will be a breach of the entire contract. Where the con- 
tract is a divisible one, failure as to a separable portion is a 
breach of that part of the contract, and the party may sue 
on that while the rest of the contract is being performed. 

It must be borne in mind that if the breach was of one 
provision of a divisible contract, the party suing must show 
that he performed whatever was due from him under that 
provision before he can claim damages for its violation. 

A divisible contract is one in which the obligation consists 
of independent parts, not necessarily united, as, if one agreed 
to deliver lOO bushels of com in March and lOO in April, 
or to deliver at the same time 50 bushels of onions and 25 
bushels of potatoes. An agreement to do several things at 



\ I. 

I I 



9K 



CONTRACTS 



several times is divisible, unless the consideration to be paid 
IS entire. ^ 

■ Breach by Refusal or Denial. Where the party positively 
refuses to perform, or denies the existence of the contract, 
an action may be brought at once for a breach of the contract 
me other party does not need to do anything further on the 
contract himself, and, if he does do anything further, cannot 
recover anything for the extra work, for the plaintiff has no 
nght to aggravate the damages. There must be, however, a 
positive refusal to perform under any conditions. 

Time to Bring Suit. The party has always a right to 
Ignore an intermediate breach and to wait until the time for 
final performance arrives before bringing suit; but if he does 
this he takes the risk that some other happening may dis- 
charge the contract before that time. If, on the other hand 
he waits until the time for performance, he is entitled to all 
the damages which he has sustained up to that time. In any 
case professional advice should be secured and followed. 
Notes: 

I. Where there is a contract for the delivery of goods 
or the performance of work by instalments, and 
there is a failure to perform one of the parts of 
the contract as agreed upon, a party ought to 
consult a lawyer as to his rights before making 
any statements to the other party about it. 
2. It is always a matter for serious consideration 
whether a breach of contract justifies a remedy 
so costly and uncertain as a suit at law. (See 
Chapter IV, "Law and Equity.") 

§ 71- l>aw Governing Remedy 

It has already been explained (§ 40) tiiat a contract is 
interpreted in reference to the law of the place where it was 
made, unless the parties state that they intend it to be governed 



I 



ENFORCEMENT OF CONTRACTS 



99 



by some other law ; but if they specify some other law merely 
to evade the law of the place where the contract was made, 
the local law will govern despite their provision. 

In bringing an action on a contract, the method of bring- 
ing it, the right to bring it, and the defenses that may be 
made to it, are all governed by the law of the place where it 
is brought, and defenses which may be made in some states 
cannot be used in others. The Statute of Limitations (§72) 
differs in the different states, so that a contract on which an 
action may not be brought in one state may be sued on in 
another if the party to be sued is subject to its jurisdiction. 



Note: 



I. 



The place to bring suit is a matter regarding which 
it is necessary to seek legal advice. 



§ 7a. Statute of Limitations 

The Statute of Limitations is the law that specifies the 
time limit within which an action may be brought. For the 
sake of peace and in order to put some limit to the time in 
which rights of property, etc., can be upset by lawsuits, laws 
have been enacted in every state providing that after a certain 
length of time specified in the law actions may not be brought 
in the courts. These laws apply to all the various forms of 
actions, including those on contracts. If the contract is under 
seal, the law usually gives a longer time in which to bring 
action on it. 

The Statute of Limitations begins to run, not from the 
date when the obligation was made, but from the date when 
payment is due. In cases in which demand is necessary before 
a party is liable, the statute begins to run from the time the 
demand was actually made. In the case of a checking account 
in a bank, the time on each check does not begin until demand 
is actually made or some act of the banker has dispensed with 






CONTRACTS 



(I 



it If each of tiie parties has an account with the other, and 
if they clearly intended to balance these accounts against each 
other, the statute begins to run against the balance at the date 
of the last entry. 

A written promise to pay the debt is sufficient to renew 
the contract and to furnish a new date from which the statute 
runs. A part payment of principal or interest of the sum 
due will likewise renew the contract. 

Sometimes the Statute of Limitations provides that, after 
the time specified, the party shall have no further right of 
action. This means that the cause of action is dead altogether, 
and thus cannot be enforced anywhere. If the law of the 
state where the contract was made has such a statute, the 
contract cannot be sued on anywhere after that time has 
passed, because the statute is said to "go to the right of suit" ; 
that is, it ceases to exist. 

Usually, however, the Statute of Limitations merely "goes 
to the remedy"; tiiat is, the cause of action remains, but tiie 
law does not allow the courts to enforce it after a certain 
time, and, if suit is brought after that time, the other party 
may plead that the law has barred the right of remedy. If, 
however, the other party does not plead the Statute of Limita- 
tions in such a case, the action may be brought, because it 
was passed only to protect him from the bringing of a suit 
at a time when he might not be able to get the evidence for 
his side, and if he is willing to fight the case on its merits 
he can do so. 

Where the Statute of Limitations in the state where the 
contract was made affects only the remedy, it does not affect 
the contract ; and the question as to whether the action may 
or may not be brought depends on the law of the state in 
which it is desired to sue. Therefore, a contract on which an 
action could not be brought in the state where it was made 
might be sued on and enforced in some other state where 



ENFORCEMENT OF CONTRACTS 



loi 



a longer time is allowed by the Statute of Limitations for 
the bringing of the action, provided the other party lives there. 

Note I 

It is right and just that if a party sleeps on his 
rights he should lose his cause of action, and 
that men should not have to fight stale claims. 



I. 



I. 

2. 

3- 



Review Questions 

To take legal action against a person who has failed to perform 

his part of a contract, what must the other party show? 
What is the rule as to time? What is "reasonable time"? 
If a tailor was to have a suit finished on the 20th of the month 

and it was not ready till the 25th, could he hold his customer? 

How would it be if the customer had told him that he was to 

sail for Europe on the 21st? 

4 If a person had agreed to sell 60 barrels of flour and 10 barrels 

of apples and only delivered the apples, could he collect the 
agreed price for the apples? Why? Suppose that the price 
of flour and apples had advanced at the time of delivery, 
how would that affect the situation? 

5 If a person is working by the month and leaves ten days before 

the end of his period because he can get a better job, can 
he collect for the time he worked? 

6. How soon is it best to bring suit for a breach of contract? 

What is to be considered before bringing suit? 

7. What law governs the interpretation of a contract? Where 

may suit be brought? Why? ,. • •* 

8. What is the Statute of Limitations and on what policy is it 

founded? Explain fully. 

9. In the state in which you live: ' 

How soon must a crime be prosecuted? 
How soon must action be brought for a personal injury? 
How soon must action be brought on an oral contract? 
How soon must action be brought on an open account? 
How soon must action be brought on a written contract? 



• The data required wUl be found in the Revised Stetutes of the State. 



I ' 



102 



;i 



10. 

II. 

12. 



CONTRACTS 

How soon must action be brought to recover land? 
How soon must action be brought on a sealed contract? 
State two ways of renewing a debt so that the Statute of Limita- 
tions will recommence to run. 

Give three ways that will prevent the statute from running 

against an ordinary debt 
Define liquidated damages in relation to a building contract. 
If. by admitted breach of contract of A. B's business is stopped 

for a period can B recover damages for profits estimated or 

only for profits proved to have been lost? 



I 



! 



CHAPTER XII 

ACTIONS ON CONTRACTS— GENERAL RULES 

§ 73. Introductory 

Besides the particular provisions of the law of the state 
where the action is brought, there are certain general rules 
which apply to actions anywhere. 

Assigned Contracts. Where a contract, or a cause of 
action arising out of a contract, has been assigned, the party 
to whom it has been assigned must bring the action in the 
name of the party to the contract from whom he received 
it, unless there is a law allowing him to sue in his own name. 
This is the rule of the common law, but now in most states 
the party who has the actual interest in the contract is allowed 
to sue in his own name. 

Joint Contracts. Where there is a joint contract, all the 
parties to it must be brought into the action ; that is, if other 
parties are jointly interested with the party suing, he must 
join them with himself as plaintiffs. If, however, they refuse 
to join as plaintiffs, the law in many cases provides that they 
may be joined as defendants, in which case the party so join- 
ing them must explain that they refused to be joined as plain- 
tiffs and mention the statute by which he is allowed to join 
them as defendants. 

If several parties are jointly obligated to the plaintiff by 
the same contract, when he sues he must include them all 
as defendants. If any of the parties to the contract are left 
out of the suit, they are released from all obligations under 
it, unless they agreed in the contract to be liable individually 
for the whole contract apart from all the others. 

103 



I04 



CONTRACTS 



II 



Assumption of Legality, The law always assumes that a 
contract is legal and proper; therefore the person who asserts 
that it was illegal, or the result of fraud, undue influence, 
duress, etc., must prove the fraud or other allegation. 

Notes: 

1. The law of the place where the contract is made 

governs its interpretation unless tlie contract ex- 
plicitly specifies otherwise. 

2. The law of the place where suit is brought governs 

the right to bring action on it, and the defenses 
which may be made. 

3. Where the Statute of Limitations of the place where 

the contract was made takes away the right of 
action, no action may afterwards be brought on 
the contract in any state. 

4. In suing on a joint contract, all the parties must be 

joined, either as plaintiffs or as defendants. 

§ 74. Specific Performance 

There are some cases where damages do not repay the 
party for what he lost on the contract, as, for instance, if 
the contract was to buy some valuable work of art which he 
could not duplicate elsewhere. In contracts for the delivery 
of goods, where it is possible for the party to go out and 
purchase other goods of the same nature, his loss can easily 
be computed and covered by damages; but where it is im- 
possible to compute the damages, or where the property pur- 
chased is a work of art, an heirloom, or something else which 
cannot be duplicated 6r easily purchased elsewhere, so that 
damages do not compensate him for his loss, the court will 
compel the other party to perform the contract. This is 
known as "specific performance," and is granted by what is 
termed a court of equity. 






f 



ACTIONS ON CONTRACTS — GENERAL RULES 10$ 

I 

Land, with everything relating to it, is always regarded 
as having a peculiar value; so that a contract for the sale 
of land may always be specifically enforced. 

In cases where the contract is for personal services, or 
cannot be carried out because the other party has disposed 
of the property involved, or for any other cause, the court 
will refuse to make a useless decree. In the case of personal 
services, it is not considered that any services which the other 
party might perform in order to escape imprisonment would 
be worth much. If, however, the other party has disposed 
of the property or otherwise put it out of his power to per- 
form the contract after the suit in equity has been begun, the 
court of equity, contrary to its usual custom, will award 
damages. 

Requirements of Courts of Equity. The party who brings 
a suit in equity must show that he has not been careless or 
negligent regarding his rights, but has insisted on them and 
promptly taken action to protect them. This carelessness and 
negligence are known in legal parlance as "laches," and, unless 
there is some excuse for them, will prevent the delinquent 
party from recovering in a suit. 

The party who brings such a suit must also be able to 
show that he has been in all respects just and fair himself, 
and he cannot ask the court to enforce any contract which is 
in the slightest degree unfair to the other party. He must 
show, too, that he has done everything in his power to fulfil 
the contract on his own part, and, if the other party has pre- 
vented him from performing it, he must show the court that 
he was and is able and willing to do all that was required 
on his part 

A court of equity will not enforce an illegal contract, or 
one that has been obtained by duress, fraud, or undue in- 
fluence. Nor will it enforce a contract that is unconscion- 
able, or where an unfair advantage has been taken of another 



io6 



CONTRACTS 



» 



party's ignorance or inexperience. (See Chapter IV, "Law 
and Equity.") 

Notes: 

I. No court will enforce a contract which is illegal or 
improper. 

Specific performance is granted only where damages 
would not compensate the party for his loss. 

Courts of equity will see justice done as nearly as 
possible, and therefore, the party who seeks their 
aid must be prepared to do justice himself. 



.2. 



3. 



§ 7S. Rules of Evidence 

Certain rules have grown up with regard to the admission 
of evidence before a court. Some of these rules have been 
dictated by convenience, in order not to take up the time of 
the court unnecessarily; others for the sake of being fair 
to both parties. Some of the rules of evidence particularly 
concern contracts. 

An oral contract must be shown by testimony. The testi- 
mony of the parties themselves, and of any witnesses who 
were present and heard the transaction, is competent; but 
anything in their conversation or relations which has no bear- 
ing on the contract will be excluded. It often happens that 
contracts are agreed upon between the two parties, and each 
remembers only the part that favors himself, and in such 
a case a court cannot give any relief, because the evidence 
balances. Where it is not possible to prove the making of 
the contract itself satisfactorily, evidence that the party in 
some way acknowledged or ratified it, or that he has partly 
performed it, may be introduced to show that there was such 
a contract. 

Competent evidence is that which is admissible. 

Material evidence is that evidence which applies directly to 
the point at issue. 



ACTIONS ON CONTRACTS — GENERAL RULES 107 

Relevant evidence is evidence relating to the matter in 
dispute. "Whatever naturally and logically tends to establish 
a fact in issue is relevant and that which does not answer 
requirements is not." ^ Irrelevant evidence lacks close connec- 
tion with the fact to be proved: is collateral to the issue. 

The general rule that hearsay evidence is excluded, is 
based on the principle that a witness may testify under oath 
as to what he himself has seen or heard, but that there is no 
value in a man's taking oath as to what another, not under 
oath, has told him. 

The Burden of Proof, The burden of proof is always on 
the party who makes an assertion; thus many cases fail, 
not because the party is in the wrong, but because he cannot 
prove his case. Judges and juries can act only on evidence 
brought before them, and if a case is good but there is no 
evidence to prove it, a court cannot give relief, and the law 
should not be blamed for it. This is why written contracts 
are so important. (See §§ 42, 43.) 

The Parol Evidence Rule. The meaning of this rule is 
that other evidence will not be admitted to vary the terms 
of a written contract, because the contract itself is the best 
evidence of what its terms are. Oral evidence may always 
be introduced to support the contract. Necessarily, the per- 
formance of the contract, or a breach of it, will have to be 
shown by oral testimony. The same is true of abandonment 
of the contract; and anything which would show adequate 
motive may be introduced as tending to support the proof of 
the abandonment 

There are exceptions to the parol evidence rule. Where 
the contract is not clear in itself, it becomes necessary to 
resort to parol evidence to explain it. Any other paper or 
matter to which the contract refers may be proved in con- 
nection with it, and, if such paper shows on its face that the 



> Jones on Evidence, Vol. I, Sec 135. 



loS 



CONTRACTS 



transaction outlined was not complete, the whole transaction 
may be proved. Oral evidence may always be introduced to 
show fraud, duress, undue influence, or illegality in the con- 
tract. The rules of evidence may even be stretched in such a 
case to allow the proof of other transactions not directly con- 
nected with the contract under consideration, tending to prove 
a fraudulent contract. 

Admissions. A party will never be allowed to use his 
own statements and acts unconnected with the actual contract 
or the transactions leading up to it, to prove that there was 
a contract, or that what he claims as to its terms is true, but 
he, however, may prove anything which the other party said 
against his own interest, and must also show any other state- 
ments made in connection with the admission which might 
have limited its effect 

Where a party employs an agent to deal for him, any 
admission against the employer's interest which the agent 
made at the time of, or during the transactions leading up 
to, the contract, may be used against the employer; but not 
admissions which the agent made after the execution of the 
contract. 

Books of Account Books of account regularly and fairly 
kept as books of original entry supported by oath are admitted 
as prima facie evidence of the entries therein contained.* 

If the clerk who made the entries is dead his handwriting 
may be proved. 

The rules in regard to admitting books of account as evi- 
dence are as follows: 

I. - They must be regularly kept in due course of busi- 
ness. 
The entries must be made by the party or an author- 
ized clerk at or about the time of the transactions. 



.2. 



•Jones on Evidence, VoL III, i 567. 



ACTIONS ON CONTRACTS — GENERAL RULES 109 

3. The books must be identified by oath. 

4. The entries must be pertinent to the issue. 

5. The books must come from proper custody. 

■ • 

These rules apply only to books of original entry, not to 
ledgers and other books footed from original entries. 

The books of a deceased person may be used as evidence 
both for and against him. The books, however, must first be 
properly proved by the clerk who made the entries or by some- 
one who can testify as to the handwriting of the deceased. 

Transactions with a Party Later Deceased, In order to 
protect estates against fraud, where a person is suing to en- 
force a contract against the executor or the administrator of 
a person who is dead, he will not be allowed to testify to any 
transactions with the deceased person, where there were no 
other witnesses present to testify as to what the deceased 
person said or did. This is very important to remember, 
because, in the case of an oral contract where no witnesses 
were present, the party who is still living might not be able 
to prove the contract at all; and this is another reason why 
all contracts should be reduced to writing. 

Notes: 

The burden of proof is on the party who makes an 
assertion. % 

Any evidence, in order to be introduced, must have 
some direct bearing on the contract itself, or on 
the transactions connected with its making and 
discharge. 

Parol evidence cannot be introduced to vary the 
terms of a written contract except in case of 
fraud, duress, undue influence, or illegality; or 
where the contract is not complete in itself or its 
terms cannot be understood without reference to 
outside circumstances. 



I. 



2. 



3- 



no 



t 



5. 



CONTRACTS 

A party cannot use his own words and acts as 
evidence in his favor; but his admissions against 
his own interest may be used against him. 

A party may not testify to his transactions with a 
deceased person where no other witnesses were 
present. 



Review Questions 

I. What is the rule as to actions where there are joint parties to 
a contract? 

a. Does a person bringing suit have to prove that the agreement 
was fair and that the defendant went into it voluntarilv> 
Why not? ^' 

3. When can a person be compelled to carry out a contract? In 

what court would such a suit be brought? 
4- Can you give three "rules of equity"? 

5. What is the difficulty in proving oral contracts ? 

6. In a suit who has the "burden of proof"? 

7. What is the rule as to parol evidence? What exceptions to 

this rule? 

a What is the rule as to transactions with a man who has since 
died? 

% What is an admission? 

10. What is meant by the rule, "Hearsay evidence is excluded"? 

Illustrate. 

11. What is relevant evidence? 

12. What is competent evidence? 

13. State the rules as to admission of books of account as evidence 

in court 

14. When are books of account of a deceased person admissible 

evidence? 



CriAPTER Xllf 

TENDER OF PAYMENT OR PERFORMANCE 

§ 76. Definition 

When a person is prevented by the other party to the con- 
tract from carrying out his part of it, he may make sure of 
his own rights under it by tendering (that is, offering) to 
pay or to perform. The offer must be made by the party 
himself, or by someone he has authorized, at the time the 
contract was due to be performed, and either at the place 
specified in the contract for goods, etc., to be delivered, or 
directly to the other party or any agent he has appointed 
to receive them. For instance, if the other party had ordered 
goods to be delivered to a railroad company, the goods might 
be offered to the railroad as an agent authorized to receive 
the goods. It is safer, however, to offer them to the party 
himself, as then no question can arise as to the validity of 
the tender. 

Where there are bulky goods, the person desiring to make 
the tender may ask the other party to name a place where 
they are to be delivered, and, if he fails to do so, may notify 
him that the goods will be delivered to him at a certain time 
and place most convenient for that other party. Then delivery 
at that time and place will be good tender although the other 
party is not there to receive the goods. 

§ 77. Time to Tender Performance 

The tender must be made at the exact time specified in 
the contract, and before sunset on that day, in order to give 
the other party a chance to examine the goods, etc. A tender 

III 



112 



CONTRACTS 



before the time for performance has arrived does not meet 
the requirements for a tender and will not save the rights 
df the party making it. If the contract specifies "on or about" 
a certain day, or "within" a certain time, a tender made a 
few days before the day set would be good. If a party cannot 
make the tender before sunset because the other party has 
remained away aU day, he may make it as soon as the other 
party returns. 

If a party positively states that he will not accept a tender 
under any circumstances, or has the party making it put off 
his premises, or refuses to hear him, it is not necessary to make 
the offer. The party from whom tender is due may explain 
to the court, and will be excused. Unless it is absolutely 
certain that it will be impossible to make a tender, however, 
the party should at least try to make it. Only the absolute 
certainty that the attempt would be useless will excuse him. 

§ 78. Extent and Kind of Tender 

The exact amount of goods or money called for by the 
contract, including any interest due, and, if the other party 
has begun an action or suffered any damages, his expenses 
or the damages due, also must be offered. If it is money, 
the party should take care that it is in "legal tender.*' This 
really means, as a usual rule, that too much small change 
should not be offered. Five-cent pieces are a legal tender 
up to $5 and not over, while silver coins less than one dollar 
are a legal tender up to $10 and not over. United States 
treasury notes, gold coins, and silver dollars are a legal tender 
to any amount. Ordinary bank notes are not legal tender, 
but, unless objected to at the time, a tender in bank notes 
would be good. 

If it is not possible to ascertain the exact amount, the 
party should take care to offer more than enough, as too little 
will not make a good tender. 



TENDER OF PAYMENT OR PERFORMANCE 1 13 

If the contract called for services, the tender will consist of 
notifying the other party that the party is ready and wiUing 
to perform the services whenever required. 

A tender must be made unconditionally. The party must 
simply offer what is due without calling for anything in return, 
not even a receipt or change, or it is not a good tender. In 
all cases the party making the tender should be accompanied 
by a competent witness. 

A tender is held to be vitiated by coupling it with a 
demand for a receipt for the sum offered, unless, as is the 
case in a few jurisdictions, a statute exists which allows the 
demand for a receipt.^ 

§ 79. Acceptance of Tender 

If a party keeps property or money that has been left with 
lum after he has had a sufficiently long time to examine and 
refuse it, it amounts to an acceptance of the tender. If he 
refuses to accept, the party making the tender may take the 
goods or money away, and inform the other party that he will 
hold them subject to his orders; he will then keep the goods 
or money separate from his own property and ready at all 
times for the other party if he calls for them. If the money 
is deposited in a bank, it must be put in a separate account and 
not drawn upon. 



Review Questions 

1. What is "tender" in legal phraseology? When must tender be 

made? What will excuse tender? 

2. To whom may tender be made, other than to the contracting 

party himself? 
^. What is the rule as to the amount tendered? 



»38 Cyc. XS4* 



114 



CONTRACTS 



4. What constitutes acceptance of tender? 

5. What kinds and amounts of money are "legal tender"? 

6. What proofs should be secured of fact of tender? Can a receipt 

for the amount paid be demanded? 

7. If tender is refused, what may party making tender do? 



CHAPTER XIV 
JOINT AND SEVERAL CONTRACTS 

§ 80. Contracts Made by More Than Two Parties 

Very frequently we find contracts to which there are more 
than two parties ; and these may be of two kinds, namely, what 
is known as a joint contract, in which all the parties on one 
side agree to be liable together for what is promised in the 
contract, eadi one being bound for the whole; or a several 
contract, where each of the parties agrees to be separately 
liable for his part. In some cases parties agree to be both 
jointly and separately liable, and then the person with whom 
the agreement was made has his choice of holding all of them 
liable together or each one liable separately. 

It is unwise to become involved in a joint contract. Where 
the parties to a joint contract are liable : 

1. Each is liable for the whole. 

2. They must be sued together, not separately. 

3. Where one dies he drops out, and the remainder 

are liable. If all died, the estate of the last de- 
cedent would be liable. 

4. If one party is released, all are released. 

Where the contract itself does not expressly state whether 
the parties are to be liable separately or all together for the 
whole contract, the court decides the nature of the contract 
from the probabilities of the case. If the promise by two or 
more is in the plural, the contract will be held joint, unless 
by the whole agreement the intention appears to hold them 
severally. For instance, the ordinary subscription agreement 



Il6 



CONTRACTS 



is a several, not a joint, contract, and no one would imagine 
that each party who signed expected to be held liable for the 
whole amount to be raised. 

Where, instead of being an agreement by several parties 
to do something, the agreement was to do something for the 
benefit of several parties, the test as to whether it is a joint 
or a several contract is whether the agreement has to be per- 
formed for aU of them together, or whether it can be per- 
formed for each one separately. Wherever two or more are 
jointly to benefit by a contract, (i) aU must join to bring suit 
on the contract; (2) if one dies the survivors have the legal 
right to sue. If it is a contract made to a corporation, the 
corporation wiU be regarded as one person; but all the mem- 
bers of a firm wiU have to join in any suit on such a contract 
If, on the contrary, it is an agreement to perform services 
for several persons as individuals, it usually amounts to a 
separate agreement with each of the individuals, and each of 
them may bring suit to enforce the agreement with the first 
party without paying any attention to the other persons. 

Where there is more than one person on either or on both 
sides of a contract, it should be stated in the contract whether 
their obhgation is joint or several, or whether the obligation to 
them IS jointly or severally. To do so will save much trouble 
in enforcing the contract, as, if a person brings suit on a joint 
contract against one person only, he releases all the rest of 
them from their obligations ; while, if it were a several contract 
he may bnng suits against one after the other until he hai 
managed to coUect the entire amount due him. 

If one of the parties to a joint contract pays the whole 
obligation, he may collect from the others who were bound 
with him their proportion of the amount he had to pay. 
Notes: 

I. Where it was cleariy not the intention of the parties * 
to be liable for each other, the contract is several. 



JOINT AND SEVERAL CONTRACTS 



117 



2. 

4. 

5- 



Where their interest is identical and in the whole 

contract, it is joint. 
Where they intend to be both jointly and severally 

liable on the whole contract, the contract is joint 

and several. 
A joint contract must be enforced by or against all 

of the parties to it. 
A party to whom others are jointly and severally 

liable may sue all of them together, or he may sue 

one at a time. 



Review Questions 

1. What is a joint contract? May more than two parties contract 

severally ? 

2. What is the liability of a person who is party to a joint contract? 

3. If two or more parties sign a bond beginning "We, the under- 

signed, are held and firmly bound," etc., what kind of contract 

is it? 

4. A note begins, "Ninety days after date, we or either of us, promise 

to pay," etc. What kind of contract is it? 

5. Distinguish between a joint and a joint and several contract. 

6. What may a person do who has been forced to pay the whole 

amount on a joint contract? 

7. Give examples of contracts that are either joint, several, or joint 

and several. 



' 






CHAPTER XV 



CONTRACTS TO SELL^ 



§8i. Sales and Contracts to Sell 

A sale is a completed transaction. The ownership of the 
goods has passed from the seller to the buyer, even though the 
seller may still hold the goods in his possession and the price 
may not yet have been paid. 

There is no substantial difference between a sale and an 
exchange or barter, and the term "sale" is frequently applied 
to the latter transaction. But a technical sale is a transfer 
for a consideration in money, while an exchange or barter is 
a transfer of property for other property. 

A contract to sell means that the ownership of the goods 
is to be transferred at some time in the future. 

The definitions given in the Uniform Sales Act are as 
follows : 

A sale of goods is an agreement whereby the seller trans- 
fers the property in goods to the buyer for a consideration, 
called the price. 

A contract to sell goods is a contract whereby the seller 
agrees to transfer the property in goods to the buyer for a 
consideration, called the price. 

The distinction between a contract to sell and a sale is this: 
in a contract to sell the goods are not delivered and title does 
not pass; while in a sale delivery is made or the title passes. 
A contract to sell is an executory contract. A sale or a 
bargain and sale is an executed contract. A sale is the transfer 
of the property or the thing from the seller to the buyer for 

>For forms of sales contracts, see Chapter CI, Forms 20-25. 

121 



122 



SALES 



a price. The Statute of Frauds applies only to contracts to 
sell. (See § 102.) 

§ 83. Unifonn Sales Act 

On account of the confusion of the law in regard to com- 
mercial transactions, commissions have been appointed by the 
various states to unite in working out uniform laws governing 
such transactions. Largely as a result of the activities of these 
commissions, two laws have been passed by many states: (i) 
The Uniform Negotiable Instruments Law has been adopted 
in all of the states and territories with the exception of 
Georgia and Porto Rico. (2) The Uniform Sales Act has 
been adopted in the following states: 



Arizona 

Connecticut 

Idaho 

Illinois 

Iowa 

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 

Nevada 



New Jersey 

New York 

North Dakota 

Ohio 

Oregon 

Pennsylvania 

Rhode Island 

Tennessee 

Utah 

Wisconsin 

Wyoming 

Territory of Alaska 



The object of these acts is not to change, but to combine, 
the best features of the existing laws of the different states. 
In some cases the states have adopted these acts with slight 
modifications, but for all practical purposes the law is imiform. 



CONTRACTS TO SELL 



123 



§ 83. What Is Necessary to the Contract of Sale 

A contract of sale (or contract to sell) must have the 
same elements as any other contract. In other words, there 
must be: 

1. Parties who are competent to contract. 

2. An agreement between those parties. 

3. Consideration for the agreement. 

4. A legal contract. 

5. A subject matter. 

These elements have all been explained at length in the 
preceding chapters relating to contracts in general. ( See Part 
II.) A few peculiarities which concern sales alone will be 
taken up in the following sections. 



Note: 
I. 



A sale is completed when the goods are transferred, 
but, if the buyer was not competent to make a con- 
tract, or the contract was illegal, the seller could 
not collect the price. 



§84. The Agreement 

This has been fully explained under contracts (§42). In 
the sale and in the contract to sell, there must be the proposal 
of terms on the one hand, and the acceptance of those terms 
on the other. 

Notes: 

1. To make a legal sale, there must be an agreement of 

the parties which can be proved. 

2. A written contract signed by both parties is the best 

evidence of such an agreement. 

3. A letter making an offer, which is accepted by an- 

other letter; is the simplest form of written con- 
tract. 



134 



SALES 



§ 85. Sales to Persons Incompetent to Contract 

The rules which have been laid down under the subject of 
contracts (§ 38) with regard to the contracts of certain per- 
sons who are by law made incompetent or are given 

of Le "^""^^'^^ ^"^^ *° *'°"*'***' ^^'"'^ "^^ ^ ^^ ^°°''^"=* 
The exception to the rules laid down, is an actual sale of 
(not a contract to sell) necessaries. A person who sells 
necessanes to a person who is not competent to make a con- 
tract may recover a reasonable price (not necessarily what he 
asked) for them. The Uniform Sales Act says that the goods 
must be necessary at the time they are delivered. 

If a merchant furnishes necessaries to a married woman 
or an mfant, he may charge them (i) to the woman or the 
infant, or (2) he may charge them to the husband or the 
father. He cannot charge them to both. He must make his 
choice and afterward bring suit against the party charged 

In this country necessaries include only food, clothing, and 
^elter of a grade suited to the means of the person to whom 
they are furnished; and in this connection it is well to bear in 
nund that such things as riding horses and automobiles are 
not necessaries. 

Notes: 

I. In supplying necessaries to a minor or married 
woman the merchant should inquire (i) whether 
the incompetent person is already provided ; (2) 
whether he or she has any property from which 
a claim for necessaries could be collected. 
2. li the incompetent person is an infant or a married 
woman, and the merchant desires to charge the 
amount to the father or the husband, he should 
inquire as to his credit. 



CONTRACTS TO SELL 



125 



I 



§86. The Consideration 

A sale or a contract of sale which did not name a price 
might still be good, because the court which was asked to 
enforce it would assume that the goods were to be paid for at 
a reasonable price and charge the buyer accordingly. The 
price fixed may be dependent on outside circumstances that 
would affect it, as for instance the market price at the time 
and place of delivery. 

The general question of consideration has been very fully 
dicussed under "Contracts" (§ 44). 

Note: 
I. Parties in making a sale should agree on the price. 
Neither the seller nor the buyer may be satisfied 
with what the law will consider reasonable. 

§ 87. Nature of Subject Matter 

A person might make a contract to sell a crop which he 
had just planted, or grass which might grow in the future on 
land which he owned, or chickens to be hatched from eggs 
which his hens might lay; but if he had not the land or the 
hens, he could not make a contract to sell grass on land which 
he might buy in the future, or eggs from hens which he might 
later acquire. 

Goods which are already in existence and in shape to be 
delivered may be contracted to be sold, and also : 

1. Goods which still require some process to render them 

ready for delivery ; i.e., cloth to be made by a tailor 
into a suit. 

2. Goods to be acquired by the seller in the future ; i.e., 

a commission merchant selling so many dozens of 
eggs which he has yet to buy from the producer. 

3. Goods which may or may not be acquired by the 

seller in the future, depending on the happening 



126 SALES 

of some condition; i.e., the same commission 
merchant selling so many dozens of eggs provided 
that he can obtain that number from the producers. 

4. An undivided share in goods; i.e., a tenth part of a 

crop of wheat. 

5. A definite niunber, weight, or measure of goods in 

mass; i.e., a bushel of oats out of a bin of oats. 

Under the Uniform Sales Act, the goods mentioned in i, 
2, and 3 cannot be the subject of a sale, but only of a con- 
tract to sdl, since they are not yet in shape to deliver. 

§ 88. Destructioii of Subject Matter 

When the goods which the seller is offering for sale have 
been entirely destroyed without his knowledge at the time the 
agreement is entered into, the contract of sale does not take 
effect. When they have been partly destroyed, the buyer may 
refuse to take any of them, or he may take those which are left 
and pay the full price which was agreed upon. In the last 
case, if the price was divided up, as so much a quart, a barrel, 
etc., he may pay for what he gets. If there was one lump 
price named for the entire lot, he must pay the entire amount, 
because the court will not attempt to split it up for him. To 
do so would be to make a new contract for the parties. 

If there has been an actual sale and the ownership of the 
goods has passed to the buyer, the loss falls on him if they are 
destroyed without fault of the seller, even though they remain 
in the seller's possession. If the ownership still remains with 
the seller, the loss would fall on the seller, wherever the goods 
may be,' even though on their way to the purchaser. 

Goods are sometimes sold with the privilege of returning 
if not sold at a certain time. In such a sale the title passes 
and in event of destruction by fire, the buyer would lose. The 
agreement to take the goods back is a condition subsequent. 



CONTRACTS TO SELL 



127 



The case is to be distinguished from that in which the goods 
are sent on consignment. (See § 93.) 

Where the contract was not for any specific articles, but 
only for so many feet of lumber, bushels of wheat, etc., the 
destruction of the wheat or lumber which the seller had at the 
time the contract was made would not excuse him from per- 
forming it. He must go out and buy more to replace what 
was lost. 

Note: 

I. The agreement of sale should be very definite as to 
the time when the ownership is to pass from the 
seller to the buyer. Much may depend on this 
fact. 

§ 89. Sales to Arrive 

Contracts are made at times for the sale of specific goods 
to arrive on a named ship. This arrival is a condition pre- 
cedent. If the goods do not arrive, or if they arrive on another 
ship, the contract is nullified. 

§ 90. A Contract of Sale Must Be Legal 

Every contract must be legal to be enforceable. A contract 
for the sale of liquor in a prohibition state could not be en- 
forced, and, if liquor had been sold, the seller could not recover 
the purchase price. This is also true where a license is re- 
quired to sell any particular commodity. An unlicensed seller 
could not collect. ( See general discussion of illegal contracts, 

§§ 39, 57.) 



Note: 
I. 



Where there has been an illegal contract, the courts 
will leave both parties just where they found them, 
and refuse to help either. 



!i 






SALES 



Review Questions 



I. 



2. 



Distinguish sale and barter. Distinguish between a sale and a 

contract to sell. 
Why is it important to know whether a particular contract is 

an executed or an executory sale? 

3. Why are uniform sales laws desirable? Has the Uniform Sales 

Act been adopted in your state? 

4. Can there be an executed sale of articles not in existence? 

5. When a seller ostensibly makes a present sale of goods which 

are not then in existence, what is the effect on the contract ? 

6. If goods sold are partly destroyed at time of sale, what right 

has the buyer? 

7. If the sale had been executed before the damage happened, what 

would be the rights of the parties? 

8. Give meaning and legal effect of a sale to arrive. 

9. B made sales, without a license, of kerosene and liquor. Can 

these accounts be enforced against the customers? 
A, a retailer, bought goods of B with the understanding that 
unsold goods would be taken back at the end of the season. 
Fire destroyed the goods without fault of A, while in A*s 
possession. Who bears the loss? 



10. 



CHAPTER XVI 

PASSING TITLE 

§ 91. Delivery 

In a sale — ^not a contract of sale (see § 81) — ^the delivery 
is made at the time, and there is no question in regard to the 
passing of title from seller to purchaser. The delivery may 
consist in merely setting aside the goods for the new owner, 
but the title passes, and, if the goods are afterwards destroyed, 
the loss is the purchaser's. In one case delivery consisted in 
giving the purchaser the key to the building where some 
machinery was stored.^ 

A flood or a railroad accident which delays the delivery 
of goods is not an excuse for failure to perform a positive 
contract. It is a general rule that, where an engagement to 
do a certain thing is positive in its terms, an accident, or 
change of conditions, will not excuse performance. The 
Japanese, it is said, look at this matter exactly the other way, 
and say that if conditions change after a contract has been 
made it would be unjust to compel performance. 

§ 92. Selection Necessary to Delivery 

It is impossible to transfer the ownership of goods that 
have not been identified or set aside. A contract to sell an 
automobile of a certain make does not transfer the title to 
any automobile until a particular automobile has been desig- 
nated as the subject matter of the contract. The precise 
article or articles that are to constitute the subject matter of 
the sale must be agreed upon. This means that the subject 

>Kdlogg Newspaper Co. v. Peterson, 163 111. 158. 

129 



r 



130 



SALES 



matter of the sale must have been selected. Usually the selec- 
tion is made by the buyer, but in some cases the buyer directly 
or indirectly authorizes the seller to make the selection for him. 

In the case mentioned in heading 4 under § 87, where 
there is the sale of an undivided interest in goods, no actual 
delivery or selection is necessary. By the sale, the purchaser 
acquires whatever the seller's rights were in the whole. If 
the seller had the right to have his share taken out of the mass, 
the buyer would have the same right ; if the seller had a right 
to a proportionate share only in the price received when the 
goods were sold, the buyer would get only the same right. The 
time, present or future, when the title will pass depends on 
the agreement. 

In a contract to sell, the time for the title to pass depends 
on the contract ; if the intention of the parties is clearly ex- 
pressed, it passes at the time they have fixed upon. The rules 
given in the next section will determine when it passes in case 
the intention is not clearly expressed 

Note: 

I. Any act which the parties intend to represent de- 
livery of the goods will be a sufficient delivery. 
If a suit of clothes has been selected and set aside 
for the purchaser, it becomes at once his property. 

§93. When the Title Passes 

The following are rules for determining the intentions of 
the parties as to the time at which the title passes, i.e., at which 
the buyer becomes the owner: 

1, Where goods are picked out and are in the shape in 

which they are to be delivered at the time the con- 
tract is made, the buyer becomes the owner at that 
time. 

2. When the goods have to be picked out, or something 



• 



PASSING TITLE 



131 



further remains to be done to them before they can 
be delivered, the buyer does not become the owner 
until that is done. 

3. When a contract is made to sell a certain number, 

weight, or measure of goods, or goods to be ac- 
quired in the future by the seller, the buyer becomes 
the owner after goods answering the description 
in the contract are turned over to him, or he takes 
possession of them. 

4. (a) When goods are delivered "on trial," or "on 

approval," the buyer becomes the owner upon their 
delivery. He may, however, cease to be the owner 
and make the seller again their owner by returning 
them or notifying the seller within the time speci- 
fied in the contract, or a reasonable time if none 
was specified, that he will not accept them. 
(b) When the buyer lets the time fixed for the re- 
turn of the goods pass without returning them, or 
keeps them beyond what is a reasonable time under 
the circumstances, or signifies his approval and his 
intention to keep them either by words or acts, he 
becomes their permanent owner. 

5. If the agreement requires delivery to the buyer at a 

particular place, or pa)mient of freight to the buyer 
or to a particular place, the title does not pass 
until the goods have reached the buyer or the place 
agreed upon. 

6. When goods are to be manufactured the title does 

not pass until they are completed and delivered 
to or accepted by the party who ordered them. 

7. If goods are ordered and shipping directions are 

given, delivery is made when the goods are de- 
livered to the railroad or other means of transport. 
After that they are the property of the buyer. 



132 



SALES 



Nofe: 



I. A contract to sell should specify precisely when title 
to the goods is to pass. , 

§ 94. Sales Without Delivery 

Whether or not there has been a legal delivery such as 
described in § 91, it is always a risk to leave property in the 
seller's possession. In those states where the Uniform Sales 
Act has been adopted, the law makes a seller who has the 
goods left in his possession the agent of the buyer to sell, 
pledge, or otherwise dispose of them. The very fact that the 
property is in the possession of the seller is likely to mislead 
innocent third parties who have no notice of the sale. If 
the seller was dishonest enough to sell the property again, 
there would be no chance of recovering it from any third 
party to whom he sold or pledged it. This is likewise the 
case in California, Colorado, Kentucky, Maine, Montana, 
Oklahoma, South Dakota, Vermont, and Washington. The 
laws in the states enimierated above regard leaving the prop- 
erty with the seller as opportunity for fraud on other persons ; 
hence the party who so left the property must lose, if the 
goods are sold to an innocent buyer. This is just, as, if a 
man has property in his possession it is fair to asstune that 
it is his, and if he sells it again, the new buyer should be 
protected. 

In other states, the court will presume that leaving the 
property with the seller amounts to a fraud, but the first buyer 
may prove that the sale to himself was a real one, made in 
good faith, and not a mere sham for the purpose of cheating 
anyone, Jmd in this way may recover his property. If it can 
be shown in any case that there was no real sale, but only a 
pretended one, a creditor of the seller may treat the goods 
left with the seller as belonging to the latter and levy on them 
in payment of his claim. 



PASSING TITLE 



133 



Where for any reason possession is to be left with the 
seller, the only safe method for the buyer is to take a formal 
bill of sale and to file it on record in the proper office of 
registry for the locality. 

Notes: 

1. If a sale is made the seller should not keep the goods. 

2. If the seller is allowed to keep the goods and sells 

them to an innocent buyer, the first buyer or- 
dinarily loses. 

§ 95. Conditional Sales 

It is possible for the seller to give the purchaser possession 
of the article that has been sold, and still to retain the ownership 
himself until the full price or a certain amount of the price 
has been paid. This can be done only by agreement, however, 
and where sales are made on the instalment plan it is very 
common to provide in the agreement of sale that the ownership 
shall not pass from the seller to the buyer until the last instal- 
ment has been paid. Such sales are known as "conditional 
sales." 

The law always enforces such an arrangement as between 
the buyer and the seller. For the sake of ready proof and 
avoidance of misunderstandings, the contract should be in 
writing and must be so expressed in many states. A common 
plan is for part payments to be made as rent, with a proviso 
that the title passes to the purchaser when the last instalment 
is paid. 

The difficulty arises from the fact that, as the buyer has 
the property in his own possession, third persons are likely 
to be misled into believing that he owns it and has the right 
to dispose of it. Most of the states get around the difficulty 
by providing that the seller must file the contract in an office 
of public record. Everybody is then required to know that it 
exists, as in the case of a mortgage. If the seller does not 



1^ 



134 



SALES 



put the contract on record, and the buyer is dishonest enough 
to dispose of the property to a third person who had no 
knowledge of the seller's rights, the seller loses the property 
in the majority of instances. 

§ 96. State Laws on Conditional Sales 

In the following states conditional sales are good against 
third parties without acknowledgment or filing in any public 

office: 

Arkansas Nevada 

California Rhode Island 

Idaho Tennessee 

Indiana Utah 

The District of Columbia, Massachusetts, Oregon and 
Louisiana have substantially the same law with a few ex- 
ceptions. 

In the following states the contract recorded is merely 

signed by the purchaser: 

Alabama Montana 

Kansas New York 

Maine Oklahoma 

Maryland Texas 

Minnesota Vermont 

West Virginia 

In some of these states more formality is required if the 
contract is for the sale of railroad equipment. 

Those states which demand a record require different 
formalities in order to permit the contract to be put on record. 

§ 97. Requirement of Affidavits to Conditional Sales Contracts 

Some states require an affidavit by the seller stating cer- 
tain facts of the sale. These are Michigan, Nebraska, New 



' \ 
> 



PASSING TITLE 



135 



Hampshire, Ohio, Pennsylvania, and Wyoming. In others, 
if the signature to the contract is attested by a witness, the 
witness may prove it, and it is then admitted to record ; very 
few of the states require that the contract shall be acknowl- 
edged in person by the buyer. Colorado, Connecticut and 
District of Columbia require acknowledgment where the sale 
is over $100 in amount. In Iowa it may be acknowledged 
by either the seller or buyer and is then entitled to be ad- 
mitted to record ; while in Florida the seller must acknowledge 
in person, or his or its signatures must be proved by one of two 
subscribing witnesses. 

§ 98. Rights in Illinois and Pennsylvania 

In Illinois the rights of the seller under a conditional sale 
will not hold against a third party to whom the buyer may 
have sold the goods. The seller may protect himself, how- 
ever, by taking a chattel mortgage on the article sold and 
recording that. In Pennsylvania where the property is not 
attached or to be attached to realty, the seller makes a con- 
tract to lease the property, the purchaser to pay a regular 
rental instead of instahnents and to give back the property 
at the end of the rental period. Then a clause is added giving 
the purchaser the right to elect to keep the property instead 
of returning it at the expiration of the lease. Where the 
property covered is attached or to be attached to realty, then 
either a conditional sale contract or a lease with option to 
purchase may be used, but it must be recorded with an affidavit. 

§ 99- Protection Against Landlord's Lien 

In those states where a landlord has a lien on property 
in rented buildings, the contract of conditional sale should be 
recorded before the property is moved into the building in 
order to protect it against his lien. 

If fixtures such as gas and electric chandeliers, etc., are 









I 



136 



SALES 



sold under a contract of conditional sale, they will be pro- 
tected by recording the contract and may be removed as 
readily as any other personal property. If, however, tlie 
property sold was afterwards attached to the building 
itself and could not be removed without injury to it, such 
as a mantel or built-in chma closets and book-shelves, the onlv 
remedy which the seller has is to claim a lien against the 
building for the amount due him. 

§ 100. Protection Against Destnictioii of Property 

Where the property is destroyed while it is held under 
a contract of conditional sale, the decisions are in conflict. In 
some states the buyer loses; in others the seller; and in other 
states the matter has not been decided. Usually, under such 
circumstances, the buyer refuses to make further payments 
but may be held Hable for the value of the goods. Unless 
the buyer can afford such a possible loss, it is prudent to 
provide for insurance. 

Notes: 

1. If a sale on condition is to be made, and the value 

of the article justifies it, a lawyer should be em- 
ployed. 

2. If articles are to be sold on instalments in different 

states, the laws of each must be considered and 
much care will be required in making the con- 
tract* 



Review Questions 

1. When does title pass in "a sale"? 

2. When does title pass under a sale "on trial" or "on approval"? 

3. When does title pass when goods are manufactured under order? 



a The standard authority on tliis general subject is Haring's "Conditional Sale 
Laira»" published by the author. Fred Benson Hartuff, Buffalo, N. Y. 



PASSING TITLE 



137 



\ 



4. When does title pass when goods are ordered to be shipped by 

rail? 

5. If the buyer desires to leave the goods he has bought with the 

seller, how can he protect his title? 

6. If the buyer after taking title leaves the goods with the seller, 

who sells them to a third party, does the third party take 
good title in your state? What recourse would the original 
buyer have? 

7. How can the seller part with possession and yet keep title? What 

is such an arrangement called? 

8. In your state what is the law as to conditional sales ? 

9. In your state if a farmer bought a binder on instalments and 

it was burned down when he had paid but half the purchase 
price, whose would the loss be? 



*u 



'I 



CHAPTER XVII 

THE STATUTE OF FRAUDS 
§ loi. Description of the Statute of Frauds 

The English law known as the Statute of Frauds was 
passed in 1676. Part of this famous law has been examined 
in § 48. The part we are here concerned with is the seventeenth 
section, which in some form has been enacted in most of the 
states and is as follows : 

No contract for the sale of any goods, wares and mer- 
chandise, for the price of ten pounds sterling or upward shall 
be allowed to be good; except the buyer shall accept part of 
the goods so sold and actually receive the same, or give some- 
thing in earnest to bind the bargain or in part payment, or 
that some note or memorandum in writing of the said bargain 
be made, and signed by the parties to be charged by such 
contract or their agents thereunto lawfully authorized. 

The Statute of Frauds applies to contracts to sell, not to 
sales. 

"Goods, wares and merchandise" are held in this country 
to include all that is usually classed as personal property, 
goods, chattels, and choses in action, i.e., accounts, claims' 
contracts, stocks, and securities. 

A contract for the sale of corporate stocks or bonds is 
good if some memorandum is made by the broker before suit 
is brought 

§ 102. Contracts to Sell 

The definition in the Uniform Sales Act is given as fol- 
lows : 

138 



THE STATUTE OF FRAUDS 139 

A contract to sell goods is a contract whereby the seller 
agrees to transfer the property in goods to the buyer for a 
consideration called the price. 

The distinction between a contract to sell and a sale is this: 
in a contract to sell, the goods are not delivered and title does 
not pass; while in a sale, delivery is made or the title passes 
to the purchaser. 

§ 103. When the Contract of Sale Must Be in Writing 

The Statute of Frauds discussed in § loi applies to con- 
tracts of sale where delivery is to be made later and where 
the value is over a certain amount. This amount ranges from 
$30 in Arkansas, Maine, and Missouri, to $500 in Arizona, 
Massachusetts, New Jersey, Rhode Island and $2,500 in Ohio. 

Fifty dollars is usual. 

The words "in value" apply where the Uniform Sales Act 
has been passed. In the old statute, the words were "in price." 
The price is the amount fixed by the parties themselves ; the 
value, what the goods are actually worth in the market. For 
this reason, contracts purely by word of mouth have become 
more risky under the Uniform Sales Act. In order that a 
contract of sale above the limited amount may be enforceable, 
a written memorandum of the terms of the agreement must 
be signed by the party against whom it is sought to enforce 
the contract, or his agent. 

The written memorandum of sale required by the Statute 
of Frauds need not be formal. It may be a note, a letter, 
a telegram, a receipt, or may consist of several papers so con- 
nected as to make an intelligible sales-contract. The written 
memorandum of sale need not be made at the time of the con- 
tract, but it must state all the material facts, the parties, the 
price, if a price was agreed upon, and specify the articles to be 
sold. It must be signed by the party, or by the agent of the 
party whom it is desired to hold. In states where the Uniform 



I 

I 



I40 



SALES 



Sales Act does not prevail, the written memorandum of sale 
may have to be subscribed; that is, signed at the end of the 
contract 

Exceptions to the rule that a sale of goods above the 
limited amount must be in writing, occur: ( i ) when the buyer 
has paid part of the price, or (2) where the buyer has accepted 
and actually received part of the goods. The last two methods 
of satisfying the statute wiU be considered in the following 
sections. 

Notes: 

1. Any contract of sale above the specified minimum 

must be in writing. 

2. All contracts should be in writing. 

§ 104. EsEception for Part Payment 

A payment made at the time of entering into the con- 
tract of sale makes it enforceable, though it may be above 
the limited value. The payment may either be a part of the 
price, or something given or paid to "bind the bargain." This 
should, strictly speaking, be in addition to the purchase price. 
In England this earnest is no part of the price of the goods. 
Usually in this country it is part of the price. The amount 
is not material. 

The thing delivered in part payment must be of some 
value, but if of any value at all, it will be sufficient to bind 
the bargain.^ 



Note. 
I.- 



Part payment will bind the bargain, but it is no 
evidence as to time, terms, and essentials of the 
agreement, and it is a poor substitute for a written 
contract 



THE STATUTE OF FRAUDS 



141 



•Wdr ▼. Hndnut, iij Md. 5*5. 



§ 105. Exception for Part Delivery 

The second case mentioned in § 103 was: "Where the buyer 
has accepted and actually received part of the goods.'* The 
word "received" means taken into actual physical possession, 
the word "accepted" means that the buyer must have deter- 
mined in his own mind to become the owner of the goods. 
Both conditions must be fulfilled to make the contract en- 
forceable. The buyer may show his consent to become the 
owner of the goods either by his words or by his conduct 

The "part of the goods" must be taken out of the actual 
amount of the goods to be delivered. Samples or specimens 
which do not come out of the buyer's share are not "part of 

the goods." 

If the buyer has directed the goods to be delivered to a 
railroad company for transportation, a delivery to the railroad 
company is a delivery to him and their receipt for the goods 
will be his receipt. If he has not so directed, there is no 
receipt and acceptance until the buyer or his agent accepts the 
goods from the railroad company. 

Note: 

I. Although he may have accepted the goods, the pur- 
chaser could still dispute the price, the warranties, 
and the other terms of the agreement. The writ- 
ten contract is the only dependable means of prov- 
ing the agreement. 

§ 106. Exception for Amounts Below Specified Value 

Contracts of sale below the minimum established by the 
law need not be in writing. If the transaction were below the 
value set in any particular state, ^uit could be brought on an 
oral contract ; i.e., a contract not in writing. If it were proved, 
it could be enforced, but an oral contract is always hard to 
prove. (See §46.) 



^ 



142 



SALf£S 



2. 



3. 



If the contract of sale is above the minimum value, suit 
cannot be brought upon it unless it is in writing. If the parties 
to such a contract (not in writing) carry it out, it becomes an 
executed sale and stands, as does any other sale, but if either 
party refuses to carry it out, the other cannot enforce it at law. 

A single contract for the sale of a number of articles, each 
of which is below the limited amount in value, must neverthe- 
less be in writing if the value of all together is greater than 
the limited amount. 

Notes: 

I. It is safest to make all contracts in writing. 

Any contract of sale above the specified minimum 
must be in writing except in cases of part pay- 
ment or part delivery. Any contract of sale below 
the minimum should be in writing. 

It is never safe to enter into any contract without 
some memorandum in writing. Especially is this 
true when there is anything indefinite about the 
possible value of the goods to be sold. 

§ 107. Exception for Work or Services 

If the article purchased involves work or services which 
make it suitable only for the original buyer, the contract 
may be oral. For example, a man goes to a dentist and 
orders a set of false teeth. The dentist takes some porcelain 
and other materials worth very much less than $50 and out 
of them makes a set for which he charges considerably over 
$50. His work and skill are what give the teeth their value, 
and the teeth which are made for one man cannot be sold 
to another. In such a case the law says it is the dentist's 
.•services, not the materials, for which the man is paying, and 
the contract is not one of sale and need not be subject to any 
of the conditions mentioned in § 103. That is, the dentist 
can bring suit without a written contract. 



. 



THE STATUTE OF FRAUDS 



143 



If the article to be made is something which can be sold 
to someone else, the contract is one of sale and must satisfy 
the requirements of the Statute of Frauds. 

The foregoing is a statement of the law where the Uniform 
Sales Act applies. There have been two other views of the 
case: one of them, the English rule that if any article was 
to be made as a result of work and services, the contract 
was one of sale; the other, the former New York rule, that 
if there was any work to be performed on the article, the 
contract was not a sale but for work and services, and the 
Statute of Frauds did not apply to it. Either of these two 
rules may still apply in a state which has not adopted the 
Uniform Sales Act. 



Note: 



I. 



Have a written contract in all cases where the price 
is more than you can afford to lose. 



I. 

2. 

3- 
4. 



Review Questions 

Distinguish between a "sale" and "contract to sell." 

Has the Uniform Sales Act been adopted in your state? 

In your state what is the amount over which contracts must be 

in writing? Must this amount be "in value" or "in price"? 
Who must sign the memorandum required by the Statute of 

•Frauds? Why should both parties sign? 
When should the memorandum required by the Statute of Frauds 

be made and what should be its form? 
What exceptions are there to the rule in the Statute of Frauds 

as to the written memorandum? 

7. What is the rule in your state as to contracts for work and 

services ? 

8. What are "goods, wares and merchandise" within the meaning of 

the Statute of Frauds? 



6. 



i 



II 



CHAPTER XVIII 

WARRANTIES^ 

I io8. Introductory 

The definition of a warranty in the Standard Dictionary 

An assurance or undertaking by the seller of property, 
express or implied, that the property is or shall be as it is 
represented or promised to be, as to quantity, quality, or title. 

If a farmer goes into an agricultural warehouse and asks 
to look at mowing machines, and after having inspected the 
stock and obtained prices to his satisfaction, says he will take 
the one which he has selected, he has assumed the responsi- 
bility for its fitness himself and has no recourse as to the 
seller for damages afterward if it should prove unsatisfactory. 
The court would apply the maxim caveat emptor, the ancient 
and harsh doctrine of the common law, signifying, "let the 
buyer beware." The common law took a sporting view of 
the dealings between buyer and seller, and did not wish to 
discourage skill in barter by stressing too much any ethical 
considerations. 

At the present day, however, both law and trade morality 
have advanced a long way beyond this primitive conception 
of the rights of buyer and seller. Nearly all trade transactions 
are now based on certain contract conditions, expressed or 
implied, by which the risk to the buyer is largely eliminated. 
A change of property for a consideration rarely takes place 



>For fonn of warnmty contract, tee Chapter CI, Form 25. 

144 



WARRANTIES 



145 



without some conditions or warranties as to quality, utility, 
or other characteristics of the commodity sold. 

Note: 

I. The buyer should take care that he has a warranty 
that what he purchases will serve his purpose. 

§ 109. Conditions Precedent 

An agreement that an article must be up to a certain 
standard is known as a condition precedent. 

A condition precedent is a specification of the kind of 
article that is wanted with which the article must comply 
before there can be any sale at all. 

If it is agreed that the article to be sold is to conform 
to a certain standard, there is no sale tmtil an article is 
produced according to that standard. For instance, if the 
seller agreed to furnish a steam pump that would raise lOO 
gallons a minute to a height of 50 feet, he must furnish a 
pump that will do exactly this before the buyer is obliged 
to take it. 

Another example of a condition precedent occurs in a 
provision that work to be done or goods to be delivered must 
be satisfactory to or approved by some third party, as when 
a church organ is installed, to be approved by some musical 
expert. 

All executory contracts are, in fact, contracts with per- 
formance as a condition precedent to payment. 

Note: 

I. Where there has been an agreement that the article 
to be sold shall be of a certain kind and quality, 
the buyer is not obliged to take any article that 
is not of that kind and quality. 



146 



SALES 



§110. Conditioiis Subsequent 

A condition subsequent is a condition that may defeat 
the sale after its completion, and give the buyer the right to 
return it and recover the price if he had paid for it. 

The technical distinction between a condition subsequent 
and a warranty has been wiped out by the Uniform Sales Act. 
Formerly, a breach of warranty entitled the injured party only 
to damages, while a breach of condition gave him his choice 
of suing for damages or returning the goods. By the Uniform 
Sales Act the buyer who suffers a breach of warranty now 
has the same choice of remedies that the buyer who suffers 
a breach of condition has always had. Wherever this act is 
in force the buyer, whether under warranty or under condi- 
tion, has his choice of suing or of returning the goods. 

§ III. Express Warranties 

An express warranty is a statement made by the seller 
about the quality, durability, working ability, etc., of the 
article sold in order to induce the buyer to purchase. The 
purchaser must have bought the goods in reliance on that 
statement. If he relies on his own judgment and selects the 
goods himself, there is no warranty even though the seller 
makes a statement of fact 

Any statement of fact or any promise by the seller in 
regard to the quantity, quality, or title of a commodity is an 
express warranty, if the natural effect of such a statement 
is to induce the buyer to purchase the goods, and if the buyer 
does purchase the goods relying on such statements. 

If there is a warranty, and upon using the goods it turns 
out to be untrue, under the Uniform Sales Act the buyer may 
return the goods, or he may sue the seller and recover 
damages in the amount of the difference between what the 
article is actually worth to him and what it would have been 
worth had the warranty been true. (See § 114.) 



WARRANTIES 



147 



« 

If a merchant tells you that his goods are the best on the 
market, this is not an express warranty, as it amounts merely 
to his opinion of them, and is what is called "merchant's 
puffing." If, on the other hand, he makes an express state- 
ment that these goods will wear better than certain similar 
goods manufactured by another firm, you may rely on his 
statement as an express warranty. 

It is always well to get a warranty in the most definite 
terms possible, for if a merchant is really willing to warrant 
his goods he will not be afraid to say so in plain language 
if the buyer insists upon it. If the merchant is not willing 
to make a definite warranty, it is better for the buyer to know 
it beforehand and to realize that he is relying on his own 
judgment and can claim nothing from the merchant in case 
the goods prove unsatisfactory. A written warranty prevents 
forgetfulness on the part of the seller. 

Notes: 

1. In all purchases, make sure that all terms are plainly 

written out, in positive language. 

2. In all prospectuses, analyze the statements and note 

the positive assertions as to material matters. 

§ 112. Implied Warranties 

111 every sale today there are certain implied warranties 
which the law compels the seller to make good. In regard 
to his right to sell the property, he warrants by the mere act 
of selling goods: 

1. That he has a right to sell the goods, or, if it be a 

contract of sale, that he will have the right to 
sell them when the time for the sale arrives. 

2. That the buyer shall not be disturbed by any claims 

made by others against the goods. 



148 



SALES 



3. That the goods are free from any claim, charge, or 
incumbrance at the time of the sale. 



These warranties do not apply to sheriff's sales and auction 
sales. There the buyer takes the risk that the article may be 
claimed by someone else. 

If the seller sells stolen goods, the buyer will be forced 
to return the goods to their rightful owner, but he may, if 
he can, recover from the seller the damages which he has 
suffered because of the sale. 

Special Situations. There is what seems to the public a 
curious situation here. If the seller had actually stolen the 
goods, the buyer would have to give them up to the rightful 
owner even though he knew nothing of the theft; whereas, if 
the seller had obtained the goods with the consent of the 
rightful owner through fraud, the buyer, ignorant of the 
fraud, might be allowed to keep them. There is a case where 
a man bought some jewelry on credit by representing himself 
to be another man, and afterwards sold the jewelry to a 
third person who had no knowledge of the fraud, and the 
third person was allowed to keep the jewelry. This is because 
the jeweler gave up the property of his own accord to the 
fraudulent seller and therefore enabled the seller to lead the 
third person into buying the jewelry and paying out his money 
for it. 

Other Implied Warranties, There are two other war- 
ranties which go with a sale of goods even though nothing 
is said about them. 

I. If the buyer makes known to the seller the purpose 
for which he intends to use the goods, or if this purpose was 
known to the seller, there is a warranty that the goods are 
fit for the purpose. 

Whenever a person goes into a market or a grocery store 
to buy food, the butcher or the grocer is supposed to know 



WARRANTIES 



149 



that he is buying it for the purpose of eating it and there 
is, therefore, a warranty that the food is fit to eat. 

If the buyer orders goods by their trade-names (Quaker 
Oats, Ivory Soap, etc.), the seller is relieved from any war- 
ranty that they are fit for his purpose. 

2. If goods are bought from a person who regularly deals 
in that kind of goods, there is a warranty that they are of 
merchantable, that is, salable quality. 

When a person orders goods from a description in a sales 
catalogue, or from a sample, there is also an implied warranty 
that they are similar to the description or sample. 

The seller is liable in damages to the buyer if any of 
these warranties are broken. He is liable only to the im- 
mediate buyer, however, and not to other persons to whom 
the buyer sells the goods, although he may, if he manufactured 
the article himself, be liable for any injuries suffered as the 
result of a defect in it. 

Note: 

I. The fact that the law implies certain warranties 
should not prevent the buyer from obtaining posi- 
tive written warranties on all important pur- 
chases. 



Review Questions 



I. 
2. 



What is a warranty? 

Is a warranty of quality of a chattel implied by the mere fact 

of sale? What is the rule? 
Distinguish a condition precedent from warranty. 
Distinguish a condition subsequent from warranty. 

5. May an injured party treat breach of a condition subsequent 

as a breach of warranty? 

6. What two elements constitute an express warranty? Distinguish 

between a "statement of fact" and an "expression of opinion." 



3 

4 



I 



ISO 



SALES 



7- What are the implied warranties of ownership where a sale is 
made? What are the implied warranties of quality? 

& To what classes of sales do the implied warranties of ownership 
not apply? 

9. Does a warranty follow the goods through successive sales? 
What exception is there to this rule? 

To whom only is the seller liable for a breach of an implied 
warranty ? 



10. 



W 



CHAPTER XIX 

REMEDIES 

§ 113. Rights of Unpaid Seller Under the Contract 

The various sorts of warranties protect the buyer in all 
business transactions. It is necessary also that the rights of 
the seller be protected. Most breaches of contract in cases 
of sale arise from the failure of the buyer to make the required 
payments. In such cases the goods may be in the possession 
of one of the following three parties: 

1. The unpaid seller may still have the goods in his 

own possession; or 

2. They may be in the possession of a railroad, a steam- 

ship, or an express company for the purpose of 
shipment to the buyer; or 

3. They may be in the possession of the buyer himself. 

A seller is still unpaid if he has been given a bad check 
or note in return for the goods. 

I. If the seller has the goods in his own possession, and 
if they were not sold on credit, any of the following courses 
is possible: 

(a) The seller may in most cases refuse to give them 

up until they are paid for. If, however, the sale 
is on credit, and the seller has no reason to believe 
that the buyer is insolvent, the seller's duty would 
be to deliver the goods. 

(b) If the goods are of a perishable nature, or if the 

buyer has failed to pay for an unreasonable length 
of time, or if the seller has reserved that right 
in his agreement of sale, he may resell them to 

151 



152 SALES 

another person, keep the price, and sue the buyer 
for damages for any loss he may have sustained 
by the transaction. 

(c) The seller may, if the time for payment has arrived, 

notify the buyer that he holds the goods for him 
and sue him for the price. 

(d) The seller may, if the time for payment has arrived 

and no payment has been made, sue the buyer 
for damages for breach of the contract. 

The measure of damages will be the difference between 
what the seller can sell the goods for to someone else, and the 
contract price. If the seller was manufacturing the article, 
he may claim damages for whatever loss he has sustained in 
time or otherwise up to the time the buyer notified him that 
he refused to take the article, not for any loss through con- 
tinuing the work after that. Of course, if he can sell the 
article when finished to someone else at the same price, there 
is no loss. 

If the goods were sold on credit, and the term of credit 
has expired while they are still in the seller's possession, or 
if the buyer has become insolvent, then the seller may exercise 
either of the last two rights. 

2. If the goods have been delivered to a railroad com- 
pany, etc., for transportation, the seller's rights may be sum- 
med up as follows: 

(a) If in giving the goods to the railroad company for 
transportation the seller reser\'es the right of 
ownership to himself, he may refuse to allow 
the goods to be delivered to the buyer until the 
latter pays the purchase price. The seller may 
keep control by shipping to himself at the destina- 
tion. Then, until he assigns the bill of lading to 
the buyer, the control is in his hands. 



REMEDIES 



153 



(b) If the buyer becomes insolvent and the goods are 
in transit, the seller may stop their delivery and 
enforce any of the remedies mentioned under 
(i), provided the railroad, express company, or 
other carrier, has not informed the buyer that 
they are holding the goods subject to his orders. 
The seller cannot, of course, stop the delivery of 
the goods after they are in the possession of the 
buyer or his agent, even though it was before 
they reached their destination. If there has been 
a bill of lading issued for the goods, the railroad 
company may refuse to give them up until the 
bill of lading is returned. 

Until the goods have come into the possession of the buyer, 
the seller's right of stoppage in transitu is superior to any 
other claim. Other creditors have tried to attach goods under 
such circumstances, but the courts have always maintained 
the seller's priority unless the buyer himself had received them, 
or they had rightfully passed under his control. The buyer 
could not defeat the right of stoppage by selling the goods in 
transit to a third party. The third party would have the same 
rights as the first buyer and no more. 

A seller who stops goods in transit on a mere rumor of 
the buyer's insolvency will be liable for damages if the buyer 

is really solvent. 

3. If the goods have come into the possession of the 
buyer, they are his property and the seller has lost all claim 
to them. The seller can only bring suit for the price if it is 
not paid when due. 

Note: 

I. A provision permitting the seller to resell the goods 
in the event of non-payment before delivery 
should be inserted in the contract in those cases 



t 



I 



154 



SALES 



where the buyer's credit is not dependable. This 
allows him to protect himself by selling them 
without running the risk of being held guilty of 
breaking the contract. 

§ 114. Rights of Buyer 

When a salesman sells goods to a customer, the employer 
has the right to refuse to accept the order of the customer, 
but, if the customer can prove actual damage, the employer 
will be liable to the extent thereof. By allowing the salesman 
to hold himself out as an authorized agent with the power of 
sale, the employer makes himself liable for his acts. 

Where the seller refuses to give up the goods to the buyer 
except where the buyer does not pay at the proper time 
(see§ 113): 

I. The buyer may have the right to the ownership of 
the goods. In this case he may sue the seller for 
damages for withholding the goods, or he may 
bring what is known as an "action in replevin" 
to get possession of the particular goods. 
. 2. Or the buyer may have no right of ownership over 
the goods, but only a right under the contract to 
have the goods delivered to him. In this case: 

(a) The buyer may sue the seller for damages 

for breach of the contract ; or 

(b) If the article was of a special kind or made 

to order so that he could not get it any- 
Avhere else, the buyer may go into a court . 
of equity and sue to compel the seller to 
perform his contract. 

The measure of damages in any of these cases is the 
difference between what the buyer could go out into the 
market and buy the goods for, and the contract price. If he 



REMEDIES 



155 



could get them for the same price or less in the market, he 
would, of course, have suffered no damages. 

Where the seller delivers or tenders the goods but they 
fail to come up to a warranty which he has made for them, 
the Uniform Sales Act allows the buyer the foUowmg 
remedies: 

I. He may accept or keep the goods and set up against 
the seller the breach of warranty by way of re- 
coupment in diminution or extinction of the price. 

2 He may accept or keep the goods and maintain an 

action against the seller for damages for the breach 

of warranty. 

3 He may refuse to accept the goods, if the property 

therein has not passed, and maintain an action 
against the seller for damages for the breach of 

warranty. 

4 He may rescind the contract to sell, or the sale, and 

refuse to receive the goods, or if the goods have 
already been received, return them or offer to 
return them to the seller and recover the price 
or any part thereof which has been paid. 

When the buyer has claimed and has been granted a remedy 
* in any one of these ways, no other remedy is thereafter 

^^^ The buyer must send back the goods in as good condition 
as that in which they were received, unless the damage has 
resulted because of the fact that they were not as warranted. 
He cannot return them if he has once accepted them knowing 
that they were not as warranted, or if he has failed to notify 
the seller within a reasonable time that he refuses to take 

If the goods are really not as warranted, and notice has 
been given to the seller that the buyer refuses to take the 









iS^ 



SALES 



goods, the buyer cannot be held liable for the price If he 
has paid any part of the sum due, he is entitled to have that 
money back before returning the goods, and, if necessary, may 
sell the goods to another party in order to get back what he 
Has paid on them, handing over the surplus to the seller. 

The measure of damages which the buyer may recover 
for a breach of the contract of warranty is the difference 
between what the goods were actually worth at the time they 
were delivered, and what they would have been worth if thev 
had been as warranted. 



Note: 



In any case where the buyer intends to assert his 

rights, he should act promptly. Delay may be 

fatal. A buyer should never accept goods without 

examining them. Where there was a warranty 

of durability, he should notify the seller of his 

dissatisfaction, or refusal to accept the goods, 

just as soon as he discovers that they are not up 

to the warranty. It is a prudent thing in such a 

case to provide in the agreement of sale that the 

buyer may keep back part of the purchase price 

till he has tested the article warranted. 



§ 115. Rescission of Sale 

M rescission results from failure to perform a contract of 
s^e. Both parties may now agree or one party may call it 
off and the other may acquiesce. If the other does not ac- 
quiesce, the rights of the parties must be determined by suit 
as set forth in the earlier part of this chapter. 

In case of rescission: (i) The buyer and the seUer may 
agree to cancel the contract. (2) When the seller has the 
goods in his possession or has stopped them on the way to 
the buyer, he may caU off the sale if he has reserved that 



REMEDIES 



157 



right in the contract and the buyer does not carry out his 
agreement: or if the buyer fails to pay for the goods within 
a reasonable length of time. (3) The buyer may call off the 
contract if the goods are not as warranted. 

When the sale is called off by agreement, the buyer must 
return the goods to the seller, and the seller must return the 
price to the buyer. But the buyer may keep the goods until 
the seller pays him back what he has paid, and the seller may 
keep the price until the buyer returns the goods. Either party 
may take the initiative. The one who most desires to cancel 
the sale will probably move first. 

When goods are not up to the warranty the buyer must 
return the goods in the same condition in which they were 
when he received them. He may either actually return them 
or notify the seller that he refuses to accept them and will 
hold them subject to his order. 



Note: 
I. 



Either party who wants to caU off the sale should 
do so just as soon as he finds out that he has 
good reason to cancel it. The court will not look 
with favor on any delay, as it is not fair to the 
other party. The buyer may sell the goods if 
necessary and get out of the money realized what 
he has paid on them. If he has paid the entire 
price and the goods do not realize that amount 
when sold, he may sue the seller for what he has 
lost on the transaction. 



1^8 



SALES 



Review Questions 



I. 



2. 
3. 



^1 



10. 



What recourse has a seller who has the goods still in his posses- 
sion: (a) If a sale was to be for cash; (b) if it was on 
credit; (c) if the goods are perishable? 

How can goods be shipped so that title remains in the seller? 

What is meant by the right of "stoppage in transitu"? If this 
right is exercised on a false rumor of the buyer's insolvency 
what is the effect? 

4. A seller of goods under contract that no payment is to be 

made till all goods are shipped, ships some, and then finds 
that the buyer has' failed. What can the seller do ? 

5. If a seller wrongfully refuses to deliver goods, what remedy 

has the buyer? When can the buyer enforce specific per- 
formance of his contract? 

6. A salesman sells a bill of goods. The employer refuses to 

accept the order. Has the buyer any recourse? 

7. When goods are ordered and on arrival they fail to come up 

to a warranty that has been made, what two alternatives has 
the buyer ? 

8. How can a sale be called off? 

9. Jackson bought 70 cords of wood of Smith. The wood was 

piled and measured on Smith's property, and Jackson was to 
come to get it. Nothing more was said. Before Jackson 
paid for or took the wood away, he went into bankruptcy. 
His receiver claimed the wood, which the seller refused to 
give up. Who was right? 
Farley sold a carload of furniture to a retail firm. While the 
goods were en route over the railroad, he learned that the 
firm was insolvent, and accordingly ordered the railroad to 
return the lot to him, offering freight and other charges. The 
railroad, however, claimed that it had attached the goods to 
satisfy a claim of its own against the insolvent firm. Could 
such attachment take precedence of the seller's lien? 






CHAPTER XX 

SALES AT AUCTION 

§116. Regulations for Sales at Auction 

A sale at auction is held in accordance with terms printed 
in the auction bills. The sale is made when the auctioneer 
lets his hammer fall. He need not accept any bid unless 
required to do so by the terms of the printed auction adver- 
tisement. Generally such an advertisement will specify that 
the property is to be sold to the highest bidder. An auctioneer 
may refuse to recognize bids that are not substantially higher 
than the last bid, the amount depending on the value of the 

article offered for sale. 

If the seller had printed in the auction bill a provision 
that he reserved the right to take part in the bidding himself, 
he might bid at the sale or have his friends do so for him. 
Otherwise if the seller himself bids, or has bids made for 
him, the person to whom the goods are finally knocked down 
may refuse to take them if he discovers the situation. 

§117. Compliance with Conditions 

The sale may be made on some condition. The buyer 
must then comply with the condition before he can receive 
the goods. Sometimes bidders are required to make a deposit 
before being allowed to bid ; sometimes they are required to 
make a deposit after the bid is accepted. If the bidder does 
not comply with the terms of the sale he forfeits this deposit, 
unless it appears that the seller could not give him good title 
to the property, in which case he may recover his deposit and 
refuse to take the goods. 

159 



i6o 



I 



SALES 



A purchaser at an auction sale must always pay cash before 
he is entitled to the property unless the printed terms provide 
otherwise. 

The seller may sue the purchaser for damages if the pur- 
chaser fails to take property which was knocked down to him. 
The seller may also seU the goods to someone else for what 
he can get for them. This amount will be deducted from 
his damages. 

§ ii8. Duties of Auctioneer 

The auctioneer acts as an agent for the seller in selling 
the property; for the buyer in signing a memorandum of the 
sale. The seUer will be bound to carry out the sale which 
the auctioneer makes, and the buyer to take the goods accord- 
tng to the memorandum of sale. An auctioneer is not allowed 
to bid for himself at a sale, but he may make bids for some- 
one else. If he does not state for whom he is selling the 
property, he is personally responsible to the purchaser for 
seeing that the terms of the sale are carried out. 

An auctioneer who sells property that does not belong to 
the seller is personally responsible to the owner of the property 
even though. he honestly thought it was part of the goods 
to be sold. Because of all this responsibility, the law usually 
requires an auctioneer to have a license. In New York a man 
must take out a license to act as auctioneer in order to sell 
even his own property. 

The auctioneer has a lien on the property for his com- 
mission, and may require the commission to be paid him before 
giving up the property to the purchaser. 

Note: 

I. In planning for an auction sale, all the terms should 
be decided upon and printed in the handbills ad- 
vertising it. If the owner of the property wants 



SALES AT AUCTION 



i6i 



10 reserve the right to bid or to have bids made 
for him, it must be definitely stated. 



Review Questions 

1. Has the owner of goods sold at auction the legal right to bid 

on them? 

2. What should be announced in the auction bills? 

3. Whose agent is the auctioneer? 

4. In your state does the auctioneer have to be licensed? May a 

man sell his own goods at auction without a license? 

5. What lien has an auctioneer? 



I 



i 

I 



PARI' IV 
AGENCY 



CHAPTER XXI 

PRINCIPLES OF AGENCY 

§119. Introductory 

In the complex commercial life of today much of the 
world's business is of necessity transacted by proxy. The 
amount of business that one man can do is limited. Hence, 
to conduct the great activities of the world, those with execu- 
tive ability empower others to act for them. At the present 
time the larger proportion of business men are not doing 
business for themselves, but are acting as agents for others. 
On this account the subject of agency is of primary im- 
portance. Many men are principals, yet more are agents; 
and all have to do with agents and should know what agents' 
powers are and just how far they represent their principals. 
The matter of agency enters into all departments of business 
and will come up again and again in the treatment of other 
subjects in this work. The subject of agency is of vital im- 
portance in insurance, partnership, and corporation law. 



§ 120. Definitions 

An agent is one who represents, or is authorized to repre- 
sent, another person in a business transaction or transactions 
with third parties. 

The person represented is known as the "principal." 

The person appointed may be known as "agent," "factor," 
"broker," "attorney," "proxy," "delegate," or "representative." 

The relation between the principal and the agent is termed 
"agency." 

i6s 



1 66 



AGENCY 






§iai. The Principal 

Anyone capable of transacting his own business may ap- 
point an agent to act for him in the same matters. A standard 
text-book expresses it thus: 

It may be stated as the general rule, by the common law 
every person who is competent to act in his own right, and 
in his own behalf, may appoint an agent* 

In the California Code it is expressed as follows: 

Any person having capacity to contract, may appoint an 
agent. 

The legal doctrine of agency is based on the principle 
that whatever a person may do for himself, he may do by 
another person. The person who appoints an agent must be, 
therefore, capable of transacting his own business; that is, 
when he appoints an agent, he njust be sane, sober, and capable 
of acting for himself, and also, he must be of full age— hence 
a minor cannot appoint an agent. 

The following are legally qualified to be principals: 

1. Corporations may appoint agents to accomplish their 

corporate purposes— in fact, a corporation can act 
only by its agents. 

2. Partnerships may appoint agents, and apart from 

this each partner is held to be an agent for the firm. 

3. Married women may appoint agents. 

4. Unincorporated clubs and societies may appoint 

agents. 

Notes: 

I. The principal must be competent to act, and in his 
sane mind. 



' Mechem on Agency, 129; Cyc. 31, p. 1175, 



PRINCIPLES OF AGENCY 



167 



2. Infants are not competent to act for themselves, and 

hence cannot appoint agents. 

3. Partnerships, clubs, and societies may be principals. 

4. Corporations can operate only through agents. 

§ laa. The Agent 

Any person who is qualified to perform a particular act 
may do it as the agent of another. 

Anyone who has capacity to act for himself is ordinarily 
capable of acting as agent for another .... it is generally 
thought he may be capable of acting as agent for another, 
although he is not capable of acting for himself. ^ 

The point to be noted in this statement is that a person 
may be legally incompetent to act for himself, but yet may 
lawfully act as agent for someone else. For instance, a minor, 
i.e., anyone under age, cannot contract for himself, but he 
may act as agent for an older person and what he does will 
bind the older person.* 

A child may be the agent of his parent. But it must be 
because the child has been appointed an agent, not simply 
because he is the child of, or is living in the house with, the 
parents. In such cases, to be an agent, the child must have 
been directly authorized by the parent to act along certain 
lines, or else it must be shown that the child had been in the 
habit of so acting with the approval of his father or mother. 

In a New Hampshire case the judge said: 

A son has no authority, as such, to lend his father's 
property, and there is no presumption that such authority has 
been given the son.* 



•31 Cyc. 1212; Lyon & Co. v. Kent, 45 Ala. 56. 
« Sheldon v. Newton, 3 Ohio State 494. 
« Johnson v. Stone, 40 N. H. 197, 



y 



1 






Ii 



M 



Notes: 



I. 






AGENCY 

A minor who cannot contract for himself may con- y/ 
tract as an agent for someone else. 

Anyone can be an agent to do anything he is suffi- 
ciently intelligent to do. 

A parent is not bound by the contract of a minor y 
child unless he has expressly or impliedly made V 
the child his agent. 



§ 123. Genera! Agents 

A general agent is one authorized to assume entire charge 
of his principal's business, or all of one phase of the business, 
or all of his principal's business at some particular place. 

Unless notified to the contrary, people dealing with an 
agent have the right to presume that his agency is a general 
one, and that he is authorized to do anything usually done in 
such a business. A general agent has unrestricted powers to 
deal along the line he is engaged in. 

The manager of a business is a general agent with power 
to use his individual judgment and to act largely upon his 
own initiative. His employer controls and limits his general 
policy, but he does many specific acts at his own discretion, 
and delegates authority in minor details to subagents who 
answer to him for what they do. 

For instance, the manager of a grocery store is a general 
agent for that purpose and has authority to purchase all kinds 
of goods that are sold in the store, and to contract for neces- 
sary repairs and improvements in the store. He has no 
authority to buy dry-goods, hardware, or other things outside 
his line of business. He has no authority to sell the whole 
store, or to buy real estate, or to build a new store. If such 
an agent wanted to contract for an addition to the existing 
store, the contractor would do well to find out whether or 



PRINCIPLES OF AGENCY 



169 



not the agent had authority to do this, because this would seem 
not to be included in his general authority. 

An agent may possess direct authority to bind his prin- 
cipal in a particular transaction ; that is to say, the principal 
may expressly empower the agent to bind him; and this 
direct authority will carry with it, by implication of law, such 
powers as are suitable and reasonably necessary to accomplish 
the intended purpose.'^ 

A superintendent of a factory is a general agent for the 
purpose of running the factory, and is presumed to have 
power and authority to do anything necessary to keep it in 
operation, and in case of emergency to preserve the business 
and the building and to protect the employees. 

Notes: 

1. A general agent has wide powers in his particular 

line of business. 

2. He has no authority to bind his principal outside 

of his general line of business. 

3. It is expedient to know, when you are dealing with 

an agent, whether he is a general agent or a 
special agent. 

4. A third person, having ascertained the general 

character and the scope of an agency, may rely 
on the agent's having such powers as naturally 
and properly belong to his position. 

5. In doubtful cases, it is safest for those dealing with 

a general agent to ascertain the extent of his 
authority. 

§ 124. Special Agents 

A special agent is one authorized to act in a specific trans- 
action or in a limited line of business. The authority of a 



» Hackett ▼. Frank, 105 Mo. App. 384. 



f 



17© 



AGENCY 



special agent is not so broad as the authority of a general 

A special agent is authorized to do some special thing. 
He may make, for instance, but the one contract or the one 
sale for which he has been appointed. Should he do some 
other special thing, which he honestly considers more to the 
mterest of his principal, he would depart from his instruc- 
tions and he alone would be liable; the party represented 
would not be bound. For example, an agent authorized to 
sell a particular painting would have authority to sell that 
painting and to bind his principal in what he did in connection 
with the one transaction, but he would have no authority 
to do anything else. 

Similarly, a special agent might be authorized to buy 
wheat for his principal ; in that case he would have no right 
to buy lumber, coal, or another grain, but he could bind his 
principal in any transaction for the purchase of wheat If 
the agent has an established office or place of business where 
he has been doing business for some time with a sign or signs 
indicating his agency and line of business, a third person 
would be safe in doing business with him in the particular 
line. 

In dealing with a special agent engaged for a particular 
transaction, a third party should ask to see the agent's au- 
thorization, which is usually in writing. 

In a New York case, a father authorized his son, to accept 
a draft for $2,000, drawn upon the father at not less than 
thirty days. The son accepted a draft for $482, payable 
ninety days after date, in the name of his father. The court 
held that he was a "special agent," and had no right to ^o 
outside of his authority.^ 

A written request to a real estate broker as special agent 
to find a purchaser for real estate, does not confer upon him 

•^txoB ▼. Palmer, 8 N. Y. 3^ 



PRINCIPLES OF AGENCY 



171 



any authority to sign a binding contract of sale for his 
principal. To do this, he must also have authority from his 
principal to sell. 

Notes: 

1. A special agent has limited authority. 

2. This authority may be indicated by: 

(a) Written authorization. 

(b) An established office with signs and adver- 

tisements. 

(c) A continued course of dealing. 

3. No one can become the agent of another except by 

the will, expressed or implied, of the principal. 

4. An agent cannot create in himself a particular au- 

thority merely by the performance of the act. 

§ 125. Del Credere Agents 

A del credere agent is one who guarantees to his principal 
that any goods sold by the agent will be paid for. 

An agent employed to sell goods sometimes guarantees 
his principal against loss from any of the customers to whom 
he sells ; in such case, the agent is termed a del credere agent. 
It is not a common arrangement, but nevertheless it is used 
occasionally in mercantile circles. 

A factor with a del credere commission or agency is one 
who in consideration of a higher compensation expressly 
agrees to pay his principal the price of the goods he sells 
himself, if the purchaser does not,^ 

A contract of a commission merchant whereby he, for a 
commission of 5 per cent, undertakes to sell goods and guaran- 
tees his sales, need not be in writing." 



'aoCyc. 186. XT V r 

» Sherwood v. Stone, 14 N. Y. 267. 



172 



AGENCY 



Review Questions 



1. Who may appoint an agent? 

2. Who may act as agent though not as principal? 

3. Distinguish between genera] and special agents. 

4. Can a real estate agent as such sign a contract binding his prin- 

cipal to sell? 

5. What is a rfel cr^rfer^ agent? 

6. If a boy came into a store and wanted to buy an Ingersoll watch 

and have it charged to his father, what would you advise ? 



CHAPTER XXII 

THE CONTRACT OF AGENCY* 

§ 126. Appointment 

The appointment of an agent may be oral, written, or by 
u^age. An agent can be legally appointed for most purposes 
by an oral or spoken contract. The objection to an oral con- 
tract is the difficulty of proving it, and the strong probability 
that there will be some misunderstanding as to the terms of 
the contract between the parties. For all ordinary purposes, 
an oral contract of agency is just as binding as a written con- 
tract, provided its terms can be proved. 

Usually an agent is appointed in writing; either a formal 
contract is drawn up and signed by both parties, or a letter or 
a telegram is sent and the other party replies to it, in which 
case the letter or the telegram and the reply thereto would 
constitute the written contract. 

When an agent is appointed to vote at a corporate meet- 
ing, his written appointment is called a "proxy,*' and is usually 
signed by the principal and by a witness. Some corporations 
require acknowledgment of the proxy before a notary public; 
but this is not usually necessary. (See Chapter CII, Forms 

3^-33) „ , ^ , , 

When an agent is appointed to sell land, or to perform 

any important act, or to conduct any important negotiations, 

he' is given formal power of attorney under seal (see Form 

28). A power of attorney is a particular kind of written 

contract of agency. Where land is to be deeded or a mortgage 

executed, the agent is called an attorney in fact and it is 

iFor forms of agency contracts, see Chapter CII, Forms 26-33. 



174 



AGENCY 



absolutely essential to have the formal power of attorney 
executed just as carefully as a deed, and acknowledged before 
a notary so that it can be filed in the registrar's office with 
the deed or the mortgage. (See § 130.) 

In many cases of agency, the agent is appointed to an 
office where he exercises certain powers without any formal 
specification of what he can do and what he cannot do. In 
such instances, the agent will be held to have all the powers 
usually attached to such an office. For instance, a ticket-seller 
for a railroad is an agent of the company and has certain well- 
known powers; beyond these he cannot go. 

^ An agent appointed to conduct a given business for his 
principal has authority to do all things incidental or essential 
to the performance of his duties as agent. If the duties of the 
agent involve the management of a mercantile business, and 
it is necessary to employ salesmen, the principal will be bound 
for the salaries whether he has given express authority to the 
agent to employ assistants or not.* 

Notes: 

1. An oral contract is hard to prove, and is liable to be 

misunderstood. 

2. An agent should be appointed by a written contract 

signed by both parties. 

3. An agent to sell or to mortgage land must be ap- 

pointed by a sealed power of attorney executed 
and filed like a deed. 

4. An agent conducting business for his principal has 

the usual powers of anyone doing such a business. 

§ 137. Express Appointment 

The express appointment of an agent requires a specific 
designation of the agent by the principal. Such an appoint- 

' Baldwin ▼. Garrett, iii Ga. 876. 



THE CONTRACT OF AGENCY 



17s 



ment consists of a definite contract for the agent's services. 
Most agents are appointed in this way. 

The express autJwrity of an agent is that authority which 
the principal directly grants to him. This includes of necessity 
(whether the agency is general or special) all such powers as 
are necessary and proper as a means of effecting the purpose 
for which the agency was created.* 

The apparent authority of an agent is that which the prin- 
cipal knowingly permits the agent to exercise, or which the 
agent exercises without objection from the principal. 

§ 138. Implied Appointment 

The appointment of an agent is implied when it is just to 
infer it from the circumstances. If A stands by and sees B 
sell goods which belong to A and makes no protest, but ac- 
quiesces, A will be held to have appointed B his agent and will 
be bound by B*s transactions. This is also called "agency by 
estoppel,** because A will be estopped from denying the fact 
of B's agency after acquiescing in B's acts as agent and per- 
mitting a third person to so regard him. 

When in the usual course of the business of a corporation 
an officer has been allowed, in his official capacity, to manage 
its affairs or to make certain contracts, his authority to repre- 
sent the corporation will be inferred from the manner in which 
he has been permitted by the company to conduct its business.* 

A wife, as the domestic manager of the house, may buy 
all things that are naturally and ordinarily necessary for the 
management of a household. She may contract for house- 
hold supplies, domestic service, medical attendance, articles of 
clothing for the use of herself and children, suitable to the 
style in which the husband lives. It is implied that she is 
authorized to do this, and the husband is held responsible for 



* Dispatch Ptg. Co. v. Nat'I Bank, 109 Minn. 440. 

* Martin v. Webb, 1 10 U. S. 7. 



176 



AGENCY 



|l 



2. 



3. 



the cost She is not held to be authorized beyond this, unless 
expressly made the agent of the husband for some particular 
purpose, in the same manner in which he would appoint a 
stranger. 

Notes: 

I. An agent's authority should be expressed by a writ- 
ten contract. 

But an agent's authority may be implied from the 
conduct of his principal. 

An agent placed in a position requiring authority 
has implied authority to do all things that are 
necessary. 

§ 129. Ratification 

Where one acts as the agent of another without authoriza- 
tion, his acts as agent may be ratified by the acquiescence of 
the principal or by the principal's taking the benefit of the 
agent's performance. It happens not infrequently that an 
agent, appointed for a definite set of duties, sees opportunity 
to do something for which he has no authority, but which will 
benefit his principal. Sometimes a person volunteers to act as 
agent for a principal whom he has not had opportunity to con- 
sult After an unauthorized act of this kind has been done, 
the principal may (when he learns of it) : 

1. Refuse to be bound by it 

2. Expressly ratify the act, 

3. Impliedly ratify it, by taking the benefit of the action. 

If the principal ratifies the unauthorized action, he must 
ratify jt as a whole. He may not ratify part of the agent's 
act and refuse to recognize the other part 

Ratification, to be eflFectual, must be made with full knowl- 
tdg^ of everything which has any material bearing on the 
transaction. 



THE CONTRACT OF AGENCY 



177 






Notes: 

1. Ratification has the same effect as an original au- 

thorization. 

2. Ratification may be express, or by acquiescence. 

3. Taking the benefit of an unauthorized act (with 

knowledge of the circumstances) is a ratification 
of the act 



§ 130. Sealed Contracts 

An agent, in order to execute a deed or sealed instrument, 
must be appointed by an instrument of like formality. 

For most purposes an agent may be appointed by a simple 
written agreement or by word of mouth; and sometimes his 
authority may be implied from circumstances. When, how- 
ever, land is to be conveyed or mortgaged, or some important 
instrument like a deed or a mortgage which is to be recorded 
in some office of public registry is to be executed, it must be 
done by the principal himself or by an agent appointed by 
power of attorney executed with all the formalities of a deed 
or instrument for record, which must be filed in the same office 
of public registry as the deed itself. An agent appointed by 
a power of attorney is called an "attorney in fact." 

The most important feature of a deed is the fact that it is 
executed under seal. It is usually witnessed and is then ac- 
knowledged before a notary public. The power of attorney 
requires the formal execution and the same acknowledgment 
that a deed would require. The doctrine may be summarized 
thus: An agent to contract under seal must be appointed 
under seal. 

Authority under seal is necessary to enable an agent to 
bind his principal by a deed or other instrument under seal. 
It is a technical, but a thoroughly settled rule of the common 
law, that an agent cannot bind a principal by a deed of con- 



17^ AGENCY 

veyance, bond or other instrument under seal, unless his 
authority to do so is also under seal* 

There is no doubt about the general rule that a power to 
execute an instrument under seal must be conferred by an 
instrument under seal executed with equal solemnity.* 

Note: 

I. A deed must be executed by the owner of the land 
or by his agent or attorney appointed under seal. 

§ 131. Appointment of Subagents 

Unless expressly or impliedly authorized, an agent is not 
empowered to appoint a subagent. 

When an agent is appointed, he is appointed because the 
principal places special trust and confidence in him. It would 
not be right for an agent to have power to delegate his 
authority to someone else, whom the principal might not care 
to have represent him. This is a maxim of the law— that 
delegated authority cannot be passed on to someone else unless 
the agent has been expressly authorized to do so, or unless it 
is customary in the particular line of business. 

A distinction is to be taken in this matter between acts 
requiring discretion and acts that simply involve some mechan- 
ical performance. An agent authorized to perform some im- 
portant work could employ others to help him in the mechanical 
details. If it were customary, he could employ an assistant 
superintendent and supervisors, but he could not delegate the 
active supervision to someone else. 

Notes: 
I. An agent cannot appoint a subagent. 
£ If he attempts to do so, ( i ) his appointee will have 

no power, and (2) the agent will be personally 

liable for the subagent's wages. 

■Clark & Slcyles on Agency. 
•Long ▼. Hartwell, 34 N. J. L. laa. 



THE CONTRACT OF AGENCY 



179 



§133. Servants and Employees 

An employee or servant may also be an agent if authorized 
to do business with third parties. 

The distinction between an employee or servant and an 
agent is that the employee or servant is employed to do certain 
things and has no relation with third parties, while an agent 
is employed to represent the principal in dealings with third 
parties. It happens in many cases that an employee is also 
an agent, but his functions as an agent are distinct from his 
functions as an employee. A servant employed in domestic 
activities becomes an agent when he or she is authorized to 
buy supplies, or to do anything else that involves dealing with 
third parties. (See § 136.) 

If a delivery man has been in the habit of making collec- 
tions, it would be safe to pay him. If a package has been sent 
t. O. D. the bearer is thereby authorized to receive the amount. 
If an employer acquiesces in his employees* acting as his 
agents, he will be estopped from denying their agency. (See 
§ 128.) 

Notes: 

1. It is not safe to deal with a servant or an employee 

unless he or she is authorized to do business with 
third parties. 

2. It is not safe to pay money to truck drivers, delivery 

men, and errand boys, unless it is known that they 
are authorized to make collections. 



§ 133. Void Contracts of Agency 

Contracts of agency for an unlawful purpose, as is the 
case with other contracts (see § 39), are illegal and cannot be 

enforced. 

For example, a contract to conduct a gambling establish- 
ment would be absolutely void. The principal could not com- 



^! 



i8o 



AGENCY 



pel the agent to carry out the contract, and the agent could not 
collect any compensation for the unlawful service. 

A contract to procure an agent to commit a positive crime, 
to bribe legislators, to forge a wiU, or to commit a burglary, is 
void absolutely and entirely. 

Any contract opposed to public policy is void. 
Certain things are said to be against public policy. The 
following are examples: to employ a lobbyist to influence 
legislation; to contract with a lawyer to organize a trust in 
restraint of trade; to employ a broker to negotiate a marriage; 
or to bribe a purchasing agent to buy from you. 

^ In any contract to do an unlawful act, both agent and 
principal are liable to damages and to criminal prosecution. If 
an agent or an employee were engaged to smuggle silks, both 
the subordinate and the principal are liable to prosecution and 
whatever penalties are imposed. In legitimate business the 
agent acting within his authority makes his principal liable but 
does not make himself responsible. In any illegal business, 
the responsibility attaches to principal and agent alike. (See 
§ 146.) 

Notes: 

Any contract for an illegal or immoral purpose is 
void. 

An agent employed to act illegally cannot collect any 

compensation. 
In a contract for an illegal or immoral act, both 

principal and agent will be liable to damages and 

to criminal prosecution. 



I. 



mm 



3- 



2. 

3» 



Review Questions 

How may an agent be appointed? 

What is necessary to appoint an agent to convey land.? 

What may an agent do in the absence of formal specification? 



THE CONTRACT OF AGENCY 



181 



4. To what extent is a wife the implied agent of her husband? 

5. How may a contract be ratified? 

6. Define "power of attorney" and "attorney in fact." 

7. Can an agent appoint a subagent? Explain answer. 

8. Distinguish between a servant and an agent. 

9. What contracts of agency are void? 

10. Can an agent who collects a gambling debt recover^ an agreed 

commission ? 

11. What is agency by estoppel? 

12. A's wife was ill and the family physician said that he would 

like to consult with a specialist. A said that he was willing. 
The family physician called in the specialist, whose diagnosis 
afterwards proved to be erroneous. Later the specialist 
brought suit for his services, to which A made the defense 
that he did not employ the specialist, and that the diagnosis 
was erroneous. Can the specialist recover? Give reason for 
answer. 

13. What general facts are necessary to validate an unauthorized 

assignment by an agent? 

14. Does the relation of agency always rest on consent? 

15. In your state is there any provision of the law with which one 

must comply in order to conduct a general mercantile or 
manufacturing business in a fixed location as agent for an- 
other? 






i 



CHAPTER XXIII 



THE PRINCIPAL 



§ 134- Princiiml's Duty to Agent 

The principars duty to his agent is to pay him his com- 
pensation and proper expenses. The relation of the principal 
to the agent is one of contract. The agent agrees to render 
services and the principal promises to pay him a salary, a com- 
mission, or a fixed sum. If no amount of compensation has 
been fixed, the agent will be entitled to whatever his services 
are reasonably worth. Unless provided otherwise, the prin- 
cipal is bound to reimburse hira for whatever expenses he has 
properly incurred. The contract should be a written one to 
avoid misunderstandings and to supply evidence of what the 
agreement really was. 

The usual rules which govern employment prevail in this 
relation. If the principal terminates the agency before the end 
of the period of employment, he must compensate the agent for 
the unexpired term less any amount the agent can secure from 
some other employment. If the agent were to be paid a com- 
mission or a gross sum and the principal were to terminate the 
agency unreasonably, the principal would be liable to pay 
damages for the breach of his contract. If the agent had 
completed his undertaking, even though the principal did not 
take advantage of what the agent had done, the agent neverthe- 
less would be entitled to full payment for his services. 

In a Missouri case, one Gelatt, a real estate agent, was 
employed by the owner of a business block to find a purchaser 
for the property. He found a buyer, but the owner advanced 

183 



THE PRINCIPAL 



183 



the price and broke up the deal. The court decided that Gelatt 
was entitled to his full compensation.* 

If the principal makes it impossible for the agent to com- 
plete the undertaking, he must compensate the agent. 

Note: 

I. The principal's duty to his agent is simply to deal 
fairly. An express contract in writing will pre- 
vent misunderstanding. 

§ 135. Principal's Duty to Third Party 

If the principal leads the third party to think that the agent 
has authority beyond his express authorization, the principal 
will be bound by whatever the agent does in the exercise of 
his apparent authority. In many such cases, the principal be- 
comes bound, not by any positive thing which he has said or 
done, but because of his acquiescence in what the agent was 
doing, or his failure to protest at the proper time. In other 
cases the principal has allowed the agent to do certain things 
beyond the latter's authority; and this has continued imtil a 
course of dealing has become established. In all such cases, 
third persons are justified in assuming that the agent's ap- 
parent authority is real, and the principal will be bound. 

The principal is liable for all acts done by the agent within 
the apparent, as well as actual, authority given. (See § 128.) 
Third parties dealing with an agent do not know his secret 
instructions, and whatever authority the agent appears to have 
can be used by him to bind his principal. The third party 
must, however, (in good faith) believe that the agent has the 
authority.^ The agent's own representations as to the extent 
of his authority, if false, will not bind his principal. 

An agent to sell goods who has possession and is in position 
to deliver is authorized to receive payment; but if he is not in 



» Gelatt V. Ridge. 177 Mo. 553- 
'Johnson v. Hurley, 115 Mo. 513. 



n 






i 



184 



AGENCY 



possession of the goods he is not authorized to receive pay- 
ment. Usage and trade customs count heavily in deciding 

what constitutes the apparent authority of an agent 

* 
Notes: 

1. When an agent is appointed, he is given as much 

authority as his position seems to warrant. 

2. Secret instructions or limitations on the agent's au- 

thority do not bind third parties unless such in- 
structions are known to these parties. 

§ 136. Principars Liability 

A principal is liable for all fraudulent, negligent, or wrong- 
ful acts of his agent in the scope of his employment. If this 
were not so, it would be possible for a man to perpetrate all 
manner of fraud and wrong, and to escape punishment by 
employing some agent of no repute to do the dirty work. A 
principal is liable for carelessness, deceptions, false pretenses, 
or wrongful acts of any kind committed by the agent in carry- 
ing out the purposes of his principal. 

The principal is liable for any damages to third persons 
arising from the mistakes or the negligence of an agent or an 
employee while acting in his service. 

In a case in Rhode Island, a salesman suspected a woman 
customer of stealing a package of spoons. He detained her, 
sent for a policeman, had her taken to a police station and 
searched. She brought suit against the firm that employed the 
salesman for the wrongful arrest and search, and was awarded 
damages. The court said: 

' If in the performance of his duty he, the salesman, mis- 
took the occasion for it or exceeded his powers or employed 
an improper degree of compulsion, the mistake and the ex- 
cess must be answered for by the master.' 



H 



k 



THE PRINCIPAL 



I8S 



'Staples ▼. Sduaidt, 18 R. I. 324. 



If an automobile salesman takes out a machine belonging 
to his employer to show to a prospective customer, and care- 
lessly runs over a foot traveler, the employer will be respon- 
sible. If the salesman takes the machine out after hours for 
his own pleasure and does the same thing, the employer will 
not be responsible, because the accident did not occur within 
the scope of the salesman's duties. 

Notes: 

1. A principal is responsible for whatever is done by 

his agent within the scope of his employment. 

2. A principal is not responsible for the acts of his 

agent done outside the scope of his employment. 

§ 137. An Undisclosed Principal 

An undisclosed principal may take the benefit of any con- 
tract made by his agent. As has been stated, an agent may 
conceal the fact that he is acting for a principal. In such a 
case, the agent renders himself personally liable, but a princi- 
pal has the right to take whatever benefit may come from any 
advantageous contract made by his agent. The undisclosed 
principal is liable if the third party discovers his existence. 
With this liability the principal has the right to take the benefit 
of the contract. 

Byington v. Simpson was a case in which a building con- 
tract was signed "J- ^- Simpson, Agt." The third party knew 
that Simpson was in fact contracting for his wife. The wife 
was held liable though her name was not mentioned.* 

The third party, upon discovery of an undisclosed principal, 
may hold responsible either the agent or the undisclosed princi- 
pal. He must elect to hold one or the other; he cannot hold 
both. To this rule there are the following exceptions: 

I. If the contract made by the agent is in the form of 
a negotiable instrument or a sealed contract, the undisclosed 

* Byington v. Simpson, 134 Mass. 169. 



i86 



AGENCY 



principal has no rights or liabilities. He cannot sue or be 
sued, as such instruments are considered as having been taken 
solely on the face of the names appearing thereon. 

2. If the principal, before his identity was disclosed, in 
good faith paid the money due on the contract to the agent, 
he cannot be held liable. This is perfectly fair to the third 
party because he gave credit to the agent and expected to get 
payment from him and had no knowledge that there was 
somebody behind the agent. The third party may collect from 
the agent if he can, but it would be unfair to let him collect 
from the unnamed principal who in that case would have to 
pay a second time. 

3. If the third party after learning that there is a certain 
principal, unequivocally chooses to hold the agent, he cannot 
alter his decision and proceed against the principal. 

4. If the contract states dearly that it is made only by 
the parties signing and that no other parties are to be intro- 
duced into the contract, the undisclosed principal rule would 
not apply. 

Notes: 

1. The agent who does not disclose his principal takes 

the entire responsibility on himself. 

2. The undisclosed principal is liable when discovered. 



Review Questions 



Jl* 



What are the duties of a principal to his agent? 
What rules usually prevail in the relation between agent and 
principal ? 

3. For what acts of the agent is the principal responsible? 

4. What docs the "scope of employment" mean? 

5. Do false representations of an agent in the "scope of his employ- 

ment" bind the principal? 

6. What is an undisclosed principal ? What risk does his agent take? 



THE PRINCIPAL 



187 



7. What may a third party do on discovery of an undisclosed 

principal ? 

8. May the principal benefit by any transaction in which the agent 

conceals the fact that there is a principal? 

9. What is the rule as to an undisclosed principal in the case of a 

sealed instrument or negotiable paper? 



II 



CHAPTER XXIV 

THE AGENT 

§ 138. Agent's Duty to Principal 

An agent is, in the line of his duties, subordinate to his 
principal. Therefore, it is an essential feature of his employ- 
ment that he should obey orders, act with good faith, and use 
such prudence, skill, and diligence in his duties as are requisite 
for their proper discharge. He must, if necessary, keep proper 
accounts and render statements to his principal. He cannot 
delegate any duty demanding discretion to others without 
special authority. If he does not do all this, if he fails in his 
duty, he may be discharged, his compensation may be denied, 
and he may be responsible in damages. 

Any profits made in the course of an agent's employment 
belong entirely to his principal. An agent may not use his 
agency for his own advantage. 

One Cummings, an agent for the sale of stock for the 
Diamond Match Company, sold stock of the company amount- 
ing at par to $170,000 for $200,000, and kept the profit of 
$30,000 for himself. Later this was discovered by the com- 
pany, which brought suit and recovered the whole amount/ 

In making a contract with an agent or confidential em- 
ployee, it is safest to contract that he shall not at any time, 
either while he is employed or thereafter, reveal or use for the 
benefit of others any special information, secret processes, lists 
of customers, or other private matters that may be learned in 
the course of his duty. The courts will protect such an agree- 
ment. 



* Graliam ▼. Cummings. 208 Pa. St. 516. 

188 



THE AGENT 



189 



In a Michigan case, a party employed in a manufactory of 
fly paper, under contract not to use methods elsewhere, after 
severing his connection with the factory, made plans to give 
others the benefit of his information. The court granted an 
injunction to prevent him from revealing the processes.^ 

Where a salesman or solicitor is employed to work up 
trade, he necessarily becomes familiar with the list of cus- 
tomers. In such a case, a contract with an agent that he shall 
not, for a period of years, engage with any other house in 
the same line doing business in the same territory, will be sus- 
tained by the courts. 

What is here said as to the duty of the agent refers to a 
general agency, where the agent gives his entire services to 
one principal. In cases of special agency, what is said of the 
agent's duty applies only so far as is necessary to effect the 
object of the agency. A bank may be an agent to collect a 
draft, but is not called upon to exercise general obedience, 
loyalty, etc. 

Notes: 

1. A general agent must be obedient, loyal, careful, 

skilful, honest, and of good habits. 

2. A special agent is required to exercise only such 

qualities as are requisite to effect the purpose of 
his agency. 

§ 139* Agent's Obedience 

Disobedience is good cause for discharge or refusal to 
compensate an agent, and renders him liable for any resulting 
damage. It is an agent's duty to obey orders ; and by so doing 
he relieves himself of any responsibility in case of misadven- 
ture. 

If, however, circumstances should arise which make it 



'Thurm Company v. Tloczynski, 114 Mich. 149. 



igo 



AGENCY 



necessary to act contrary to the instructions he has received, 
it is his duty to do this, provided, of course, that it is impos- 
sible to consult his principal before acting. Emergencies may 
ocair where it is the duty of the agent to do the best thing 
possible, even though it involves his disregarding orders. 
Where no emergency exists, however, the agent violates his 
directions at his own risk It is the principal's right to decide 
how he wishes his matters attended to; and if the agent obeys 
and loss ensues, it is the loss of the principal. If a shipping 
agent or railroad varies directions that goods are to go over 
some particular line, the agent or the railroad incurs the 
liability of an insurer. 

An agent who has been instructed to sell for cash has no 
authority to allow credit. If he gives credit and loss ensues, 
he is responsible. If he is authorized to buy or to sell at a 
certain price, he may not go beyond this. This is not to be 
understood as prohibiting trifling departures and immaterial 
variations from exact instructions. The law does not regard 
negligible things. 

An agent who is instructed to ship goods or to r«nit money 
in a particular way must obey his instructions to the letter. 

Notes: 

An agent must obey orders if he does not want to 

make himself liable. 
When an emergency exists he may act contrary to 

instructions. 
A principal should, where possible, give explicit 

orders to his agent 



I. 



m» 



3- 



§140. Agent's Good Faith 

Good faith is essential on the part of anyone acting in the 
capacity of agent. If an agent is found to be working for his 
own interests as opposed to those of his employer, he may be 
discharged summarily. If he makes false reports or deceives 



THE AGENT 



191 



his employer, or defrauds him in any way, he may be dis- 
charged ; and he wiU have forfeited any claim to compensation. 
If he learns of anything in the line of his business to the 
pnncpal s advantage, it is his duty to let his principal know 
and have the benefit of it. 

A broker, in a Michigan case, sold land to a party whom 
the owner had previously excepted from those to whom the 
broker might sell. It was held that the latter was not entitled 

to commission.^ 

In a Massachusetts case, an agent made a sale of some 
property, and in rendering the account to his employer charged 
h.m $50 as paid to an attorney for examining the title, whereas 
he really paid only $25. The court held that he lost his right 
to commission.* ° 

The Agent Must Not Act for Both Parties. An agent may 
not represent both parties to a transaction. He may not earn 
a commission from both buyer and seUer. This is a rule that 
holds good everywhere. But it is said that a double agencv 
may be valid where both parties know of the double agencv 
and agree to it; it is then understood that the agency requires 
no independent discretion. 

The Agent Must Not Act for Himself. If the agent is 
employed by a principal to manage his business, what he does 
is done for the principal. It is not right for the agent to be 
mterested adversely; and all the profits that are made in con- 
nection with the principal's business belong to the principal 
unless he has previously agreed to give the agent a share of 
the profits as part or aU of his compensation. 

If the agent in the course of acting for his principal obtains 
any particular advantage to himself, and the principal dis- J 
covers it, the latter can hold the agent accountable for the ^ 
profits or the property so obtained. 




• Ranney t. Henry. t«o Mich. 597. 
Little V. Phipps et «/., 208 Mass. 33 1. 



192 



AGENCY 



An Agent Must Not Compete With His Principal. An 
agent must not be interested adversely to his principal. 
Neither may he represent and sell goods for a competitor of 
his principal. An employer has a right to his agent's absolute 
loyalty. If an agent uses his knowledge of his principal's 
affairs to secure an advantage for himself, the courts will 
compel him to make restitution. The law moves on a high 
plane in matters of this kind. 

The Agent Must Be of Good Habits, Any habits which 
interfere with the proper discharge of the agent's duty are 
sufficient reason for his discharge. Drunkenness in the day- 
time or while attending to business is undoubtedly sufficient 
reason for dismissal. As in the case of other employees, the 
circumstances must be considered. 

Generally speaking, an agent may be discharged for dnink- 
cnness, gambling, or licentiousness. Possibly, the courts wotild 
not in all cases justify too dose an inquisition into the private 
habits of employees. A bank, however, employs detectives; 
and if an employee indulges in loose living he is discharged 
and has no recourse. Usually an agent who is discharged for 
any reason of this kind cannot afford to risk the notoriety 
involved in an attempt to hold his employer for damages. 

Non-Payment No Excuse for Non-Performance, The 
fact that the agent is unpaid does not affect his responsibility. 
The agent's liability does not depend upon how well he is paid 
for what he does, or whether he is paid at all ; for, if he under- 
takes to do anything for another, he must do it well ; and he 
is responsible in case of bad faith, negligence, or lack of skill. 

Notes: 

' I. The doctrine of the law on the subject of the agent's 
good faith is on an exceptionally high plane. 
2. The agent must not act as the agent of both parties 
unless both know of and agree to it 



THE AGENT 



193 



3. The agent must not act for himself in the principal's 

affairs. 

4. The agent must not compete with his principal. 

5. The agent must be of good habits. 

§ Z4X. Agent's Care, Skill, and Diligence 

If anyone undertakes the duties of an agent, he is assumed 
to have the necessary skill and ability to perform the said 
duties. In all matters connected with his agency, he is ex- 
pected to act as an ordinarily prudent, careful business man 
would act in the conduct of his own affairs. If the agent is 
a lawyer, he undertakes to have professional ability to repre- 
sent his client in an adequate manner. If he is a financial agent 
and invests his client's funds imprudently, he is responsible. 

The rule is well settled that an agent is not only bound 
to act in good faith, but to exercise reasonable diligence, and 
such care and skill as are ordinarily possessed by persons of 
common capacity engaged in the same business.^ 

A firm engaged as insurance brokers, if it takes out poli- 
cies for its clients in irresponsible companies, will, in event 
of loss, be required to make good the damage resulting from 
its neglect to use proper care.® 

Custody of Funds. It is the duty of the agent to account 
for all funds and property of the principal which come into 
his possession. In this particular he must obey the rules that 
govern one person who holds the property of another. 

The agent should not deposit funds belonging to his prin- 
cipal to his own bank account; but should open a separate 
account in the name of his principal, or in his own name as 
agent. If he does this, he is not responsible in the event of 
the bank's failure and the loss of part or all of the funds. In 
the same way, it is his duty to turn all money and other 

■ Whitney v. Martine, 88 N. Y. 535. 

* Sheppard v. Davis, 42 A. D. (N. Y.) 46a. 



|/ 



194 



AGENCY 



THE AGENT 



195 



property in his possession over to the principal or to the 
principal's order. 

Any money held by an agent for his principal is a trust 
fund. 

In an Indiana case the judge said: 

In case it becomes the duty of an agent or a trustee to 
deposit money belonging to his principal, he can escape risk 
by making the deposit in his principal's name; or by so dis- 
tinguishing it on the books of the bank as to indicate in some 
way that it is the principal's money. If he deposits it in his 
own name, he will not, in case of loss, be permitted to throw 
the loss on his principal^ 

Notes: 

1. The theory of the law in these matters is better than 

the results in actual practice. It is in most cases 
impossible to obtain legal redress for the common 
lack of care, skill, and diligence in agents. 

2. In all matters relating to the care and the custody of 

money belonging to others, too great care cannot 
be exercised. 

3. The treasurers of clubs, informal organizations, and 

unincorporated associations, should observe the 
rules that have been given for agents in charge of 
ftmds. 

§ 14a. The Agent's Signature 

The agent is acting for the principal, therefore when he 
signs a contract he should sign the principal's name, followed 
with his own in this form: "By Henry Parker, Agent." When 
there is a regular course of business, a rubber stamp will prob- 
ably be used with a blank for the written signature of the 
agent, as follows: "George Wayman, By , Agent'* Such 



* Walmer v. Dolan, 108 IncL 500. 



a signature is safe and in no case can it bind the agent per- 
sonally. 

A corporation can act only by its agents. The rule as 
to the signature of contracts is the same and the name of the 
corporation followed by the name of the officer signing is the 
proper form. Letters are often signed by the officer, as "James 
Haywood, President," the letterhead showing the name of 
the corporation and that the individual signing holds the office 
he claims. 

The better practice is to have the full corporation signature : 

Edgemont Water Company, 

By Harvey Gray, Treasurer. 

Where notes or other negotiable papers are to be signed 
by the agent for a corporation or other principal, it is not safe 
to sign except in the approved form, the principal's name in 

full followed with "By , Agent." Any other signature 

may not only fail to bind the corporation or other principal but 
may involve the officer or agent in a personal liability as maker 
or indorser. 

§ X43. Agent's Duty to Third Party 

Observance of the usual rules of fair dealing and honest 
treatment is the only duty owed by the agent to the third party. 
The agent is the representative of his principal, and is to work 
in the interests of his principal. If he resorts to trickery or 
fraud, he himself is liable for any damages caused to the third 
party. An agent cannot be held for a legitimate business con- 
tract within the scope of his authority. He binds his principal, 
not himself. But his principal cannot authorize him to do 
wrong; and if he does wrong both he and his principal are 
held. 

The agent may legally do whatever the law allows his 
principal to do. The law is not at its best when it defines the 



I 



196 



AGENCY 



THE AGENT 



l|)| 



lit 



rights of buyer and seller. The better business houses, in their 
actual practice, act on a plane far higher than that which the 
law compels. In other words, good business prescribes a much 
higher standard of morality in the matter of sales than does 
the law. 

On this account the standards of good business are given 
here, rather than the legal requirements. Let your dealings be 
characterized by fairness and liberal treatment. Deal with the 
third party in such a manner that you can deal with him again. 
All good and permanent business is to the advantage of both 
parties. Make every customer a lasting business friend. Treat 
him as you would like to have him treat you in a like case. 

Note: 

I. If an agent has a principal who does not believe in 
the above standard of good business, he had better 
look for another job. 

§ 144. Limitation of Agent's Authority 

The agent rarely has unlimited authority. In established 
positions, such as that of a bank cashier, a railroad conductor, 
or a retail salesman, the duties are settled and the authority 
of the incumbent is known to his principal, to those he deals 
with, and to himself. Usually an agent in such a position 
keeps to his routine, and his powers are entirely familiar to 
all concerned. 

As between his principal and himself, the agent's authority 
is limited: (i) by the limitations usual to the employment, and 
(2) by the limitations expressed in the agreement. If he ex- 
ceeds these limitations, he may be discharged from his position, 
and may be held for damages if he is responsible. 

Iti dealing with third parties, the agent, in all those cases 
where his apparent authority exceeds his real authority, may 
bind his principal. In such an event, the agent must answer 
to his principal for his abuse of authority. 



197 



Notes: 

1. An agent has the usual authority pertaining to his 

position, unless restricted by special agreement. 

2. An agent has always such authority as his agreement 

with his principal permits. 

3. An agent may bind his principal wrongfully when 

his apparent authority exceeds his real authorit3\ 

§ 145. Agent's Fraudulent Conduct 

The question of the agent's bad faith to his principal has 
already been discussed. If he perpetrates a fraud on a third 
party while transacting his principal's business, both principal 
and agent are liable. The agent will not be able to shift re- 
sponsibility to his principal. A principal cannot authorize his 
agent to commit fraud. 

In Weber v. Weber, the action was against Caroline Weber 
for stating positively that there was no mortgage on a piece 
of land which she was selling as the agent of her husband. 
The court said: 

All persons who are active in defrauding others are liable 
for what they do, whether they act in one capacity or an- 
other.* 

In a case where the president of a medical institute was 
made a party defendant in a proceeding against the institution 
for defrauding a patient, the judge said: 

We are not aware of any rule of law which will excuse 
and absolve a person from the consequence of his own wrong 
doing, because he happened to be the agent of another at the 
time of the perpetration of the wrong.* 

Notes: 

I, An agent cannot use his agency to protect him in 
doing wrong. 



• Weber ▼. Weber, 47 Mich. 569. 

* Hedin ▼. MinneapoLts Medical Institute, 6a Minn. 146. 



igB 



AGENCY 



THE AGENT 



199 



II 



2. In case of fraud or misrepresentation, the agent as 
well as the principal is liable to the person injured. 

§ X46. Agent's Liability 

The agent makes himself liable with his principal, as we 
have seen, when he is guilty of any fraudulent conduct 

Where the business is illegal, the agent is liable with the 
principal. 

He also makes himself liable when he exceeds his authority, 
unless the third party knows the nature of the agent's action. 

In most cases where an agent deals with third parties, the 
third parties depend upon the agent to inform them correctly 
as to the extent of his authority. If the agent deceives them 
as to this, he makes himself personally liable to the third party 
to the same extent that he would be had he made the contract 
in his own name instead of that of his principal. 

One Kroeger insured his premises through Pitcaim, an 
agent, who told Kroeger that he could keep a small amount 
of gasoline on the premises without making his policy void. 
Pitcaim had no authority to do this. The premises were 
burned, and Kroeger could not recover from the insurance 
company on account of the storage of gasoline. The court did, 
however, allow him to recover his damages from Pitcaim." 

If the agent has apparent authority but is limited by pri- 
vate instmctions from his principal, he can nevertheless bind 
his principal by his contract within the scope of his apparent 
authority. In such a case, he is liable to his principal for any 
unwarranted action. 

It happens sometimes that an agent deals with third parties 
and, assumes to be the principal; i.e., he does not represent 
himself to be an agent, or disclose the fact that he is acting for 
someone else. In such a case he will be held personally, as 
though he were the principal. This is plainly just and right. 

1* Kroeger ▼. Pttcaim, loi Pk. St 311. 



Where an agent represents a principal who is non-existent 
or irresponsible, he binds himself. On occasion agents have y 
represented themselves as having a principal who did not exist / 
— in such cases they bind themselves. Thus, parties acting as^ 
directors in a non-existent corporation may be held. 

If an agent represents any irresponsible body, such as a 
social club, a meeting, or any informal organization, he will in 
all such cases render himself liable. If the agent is authorized 
by a motion, all members who voted for the motion are liable, 
and those who are forced to pay can hold for contributions all 
others who joined in authorizing the expense.^^ 

The Northeastern Pigeon & Bantam Society, a voluntary 
association, held an exhibition of fancy stock and offered 
premiums. The expense exceeded the receipts. The court 
held that those members who paid the loss could bring suit to 
compel all the other members who had voted to hold the ex- 
hibition to pay their pro rata.^* 

A common case under this general head is that of a pro- 
moter who incurs liabilities for a corporation before it is in- 
corporated. Until the corporation has come into being, it 
cannot appoint an agent ; therefore the general rule is that the 
corporation cannot be bound, and that those who deal with the 
promoter must look to him for compensation. 

The general doctrine that no one is authorized to contract 
for a corporation before it is formed, applies to all contracts 
with and by promoters. The promoter himself is liable on 
these pre-corporate contracts, unless otherwise expressly 
provided; but the corporation is not.^^ 

Where an agent commits an assault in the discharge of his 
duty, he may be held responsible. 

The agent in charge of the grounds of a fishing club in 



** Lewis V. Tilton, 64 Iowa 220. 

"Ray V. Powers, 134 Mass. 22. 

» Conyngton's "Corporate Organization and Management" (Edition of 1917), I 3a. 



900 



AGENCY 



Kentucky, assailed a party whom he accused of trespassing. 
The party assaulted brought suit for damages against the agent 
and the club, and got judgment against both." 

If the agent got into a quarrel independently, and not in 
the discharge of his duty, his principal would not be affected. 

Sometimes, even when the agent acts in entire good faith, 
he may become personally liable for his blunders. For in- 
stance: 

In a California case, Wilson, a broker, sold some mining 
stock for a customer. The stock turned out to have been 
stolen from a party named Swim, who brought suit against 
Wilson for the value of the stock. The court held that the 
principal who employed Wilson to sell the stock had no title 
and could give none to Wilson, who was therefore compelled 
to pay the value of the stock." 

Notes: 

I. An agent is liable for fraudulent conduct. 

An agent is liable for exceeding his authority. 

An agent is liable if he does not disclose his prin- 
cipal. 

An agent is liable if he represents a non-existent or 
irresponsible principal. 

An agent is liable for wrongful acts within the scope 
of his emplo)mient. 

An agent may be liable for blunders. 



2. 
3» 



S 



Review Questions 

1. What are the general duties of an agent to his principal ? 

2. Can C, an agent, in the course of his duties make any profit 

for himself? 

3. When may an agent disobey orders? 

4. A refuses to pay B commissions for sale of stock on the ground 

Stewmrt, las Kf. 8. 



MNew EUerslie FisMiiff Qub ▼. 
*Swim ▼. Wilson. 13 Cal. 126. 



1 



THE AGENT 



201 



10. 



II. 



that B received commissions from the parties who bought 
the stock. B proved that A knew at the time that B was also 
being paid by the buyers. Must A pay? 

5. If an agent has not been paid promptly, can he collect money 

due his principal and pay himself? 

6. May a lawyer act for both sides in a controversy? How would 

it be in negotiating a contract? 

7. If money ot the principal is deposited by an agent in his own 

name, can the agent's creditors take it? 

8. Is an agent liable for money of his principal if he put it in his 

own cash drawer over night and it is stolen? If he puts 
it in a bank in his own name with a designation "Agent's 
Name, No. 2," to distinguish it from his own personal account, 
and the bank fails? 

9. How should an agent execute negotiable paper in order that 

it may be binding on his principal and not upon himself? 

What do you understand by the "apparent authority" of an 
agent ? 

A was a cashier of the Second National Bank. B was a 
depositor therein, and was on his way to the bank one day 
to make a deposit. When about half way to the bank he met 
the cashier, stopped him, told him that he was about to make 
the deposit, and asked him if he would take the money, there. 
The cashier agreed, took the money, made the proper entry in 
the deposit book, and handed it back to B. A, the cashier, how- 
ever, did not put the money to B's credit, but kept it and con- 
verted it to his own use, and B sued the bank for the amount. 
Is he, or is he not, entitled to recover? Did the cashier have 
any apparent or real authority to receive the deposit? 

When may the members of an unincorporated club be held for 
an agent's acts? 

13. When is an agent personally liable to third persons? 

14. What is the agent's liability on promissory notes signed? 

(a) A, by B, Agent 

(b) B, Agent for A 

(c) B, Agent of A 
B, as Agent 

X Y Company, by A. President 
corporation be bound by contracts made before it was 



12. 



15. 



(d) 
(e) 
Can a 



organized ? 



THE THIRD PARTY 



203 



CHAPXER XXV 
THE THIRD PARTY 

§ 147. Third Party's Relation to Agent 

Strictly speaking, the third party has no relation to the 
agent The agent represents the principal, and the third party 
is dealing only with the principal. When the agent goes be- 
yond his powers, then he makes himself responsible and may 
be held; the same is true when he represents an imdisclosed 
principal, or a fictitious principal. The third party should 
know that the agent with whom he is dealing has authority 
to represent his principal, and how far this authority justifies 
the action of the agent. 

A third party dealing with an agent in excess of his author- 
ity does so at his own risk. It is obvious that an agent cannot 
go beyond his authority. He is authorized for such general 
or special purposes as the principal indicates, and further than 
this he may not go. 

Where an agent is empowered by a written instrument to 
do certain things, it is very plain that he has no authority to do 
anything more than what is specified; but, as in most cases of 
general agency the agent has the right to do everything inci- 
dental to his main agency business, it is sometimes not easy 
to tell what is in excess of his authority and what he has the 
right to do. 

Law sold goods amounting to $320 to Stokes. The sale 
was made by Sheridan, Law's salesman. The sale was on a 
credit till the end of the month. Next day the goods were 
shipped and a bill was enclosed in a letter. The letter, signed 



by Law, said, "Please remit amount direct to me.'* The bill 
had on its face in red ink, "All remittances on account, or in 
settlement of bills, must be made direct to the principal." 
About a month later Stokes paid Sheridan the amount of the 
bill. Sheridan absconded with the money ; Law brought suit 
and obtained judgment.^ 

In this case the salesman had no authority to collect. The 
case was clear for the plaintiff. Law, because he had given 
notice on his billhead and in his letter of his limitation on the 
salesman's authority. Usually there would be more trouble 
in a case of this kind because the proof would not be so clear. 
The agent himself would be liable to suit by the third party ; 
but in such a case the probability would be that the agent was 
judgment-proof or had left for fresh fields and pastures new. 
In each case the third party should know for his own safety 
just what power the agent has to bind his principal, and that 
the principal is responsible. He cannot always rely on the 
representations of the agent himself as to the extent of his 
authority. It is the third party's duty to make due inquiry 
into the matter, as in case of a dispute later the burden of 
proof is on the third party to show that the agent had authority 
for the particular act. 

Notes* 

1. It is unsafe for a third party to deal with an agent 

without sufficient information as to his authority. 

2. Care should be taken never to make payments to an 

unauthorized agent. 

3. Where salesmen are not expected to collect payment, 

customers should be informed of the fact. 

4. In dealing with an agent, it is necessary to know 

whom he represents and how far his authority 
extends. 



» Law V. Stokes, 32 N. J. L. 249- 






AGENCY 



§ 148. Third Party's Relation to the Principal 

The third party is really dealing with the principal, and the 
agent is merely the'means of communication. When the con- 
tract is signed, the name of the agent is attached as agent, and 
the principal, not the agent, is bound. Therefore the relation 
between the third party and the principal is the same as be- 
tween any other parties to a contract 

The third party is brought into the contract relation as a 
principal, and after that in most cases the agent is disregarded. 
The principal and the third party contract with each other, and, 
if the contract has not been executed, each has the right to 
compel the performance or to recover damages for any breach 
or failure in performance. In any dispute in regard to the 
contract, the resulting suit will be between the parties, and the 
agent will not figure save as a witness able to give material 
evidence. If there has been fraud or false representation on 
either side, the fact that the transaction has been negotiated 
through an agent does not affect the liabilities or the remedies. 

Note: 

I. When dealing through an agent, the third party 
should bear in mind that it is the principal with 
whom he contracts. 



I. 

2. 

3- 



Review Questions 

How can a person dealing with an agent ascertain his authority? 

Why is it hard to tell what the agent has a right to do ? 
With whom does the third party really contract? If any suit 

arose, who would be the parties? 
When does an agent make himself responsible to the third party ? 



CHAPTER XXVI 

TERMINATION OF AGENCY 

§ 149. Termination by Fulfilment 

The agent's authority is terminated when he completes the 
purposes of his agency, or at the expiration of the period for 
which he was engaged. It is obvious that if an agent has been 
employed to purchase a farm and the farm has been purchased, 
the agent's authority is ended; or if a salesman has been en- 
gaged for a year to sell goods, it is plain that the agency, unless 
renewed, terminates at the end of the year. Generally, the mle . 
is that the agency ends at the termination of the period for^^ 
which the agent has been engaged, or the completion of the 
undertaking for which he has been retained. 

The principal should in some way inform those who have 
been dealing with the agent that the agent no longer has au- 
thority to act. If the principal fails to do this, and the agent 
continues to act, the principal is bound. 

Note: 

I. An agency terminates naturally (a) when the term 
ends, or (b) when the undertaking is completed. 

§ 150. Termination by Either Party 

The contract of agency may be terminated at any time by 
either the principal or the agent. It is obvious that the con- 
tract between principal and agent (like any other contract) 
may terminate at any time by agreement of the parties. It is 
also true that the contract (since it is one of mutual trust and 
confidence) may be terminated at will by either one of the 
parties against the consent of the other party, except in the 

205 



y 



3o6 



AGENCY 



TERMINATION OF AGENCY 



207 



case of an agent having an interest in the subject matter; in 
which event the principal cannot terminate the relation without 
the agent's consent. (See § 152.) 

If the principal and the agent contracted for a certain 
period of time or for a certain undertaking, and the principal 
revoked the agent's authority without good cause, the former 
would be liable to suit for damages by the agent for breach of 
contract. 

Where there is einpIo3rment for a definite period of time, 
express or implied, and the agent is discharged without cause 
before the expiration of the period, the principal will be 
liable to the agent as in the breach of any other contract; 
in such cases the agent may elect to treat the contract as 
rescinded and bring an action to recover the value of his 
services and money expended.* 

The agent can renounce his employment at any time. The 
courts will not force a man to work for another against his 
will. If, however, the agent has agreed to act for a certain 
time, or to do some particular thing, he may be liable to pay 
damages if he breaks off before the expiration of the period. 
Also, if he tries to act for someone else in the same line of 
business before the expiration of the term, it is probable that 
the principal could obtain an injunction to prevent his working 
for a competitor. In a contract of agency, there is often 
inserted a clause providing that the agent shall not leave the 
employ of the principal and represent anyone else in the same 
line of business for a specified period of time after his con- 
tract terminates. (See § 138.) 

If the «;ubject matter of an agency is destroyed, the con- 
tract is thereby terminated. A case of this kind would occur 
wheil a building which is to be leased by an agent is burned 
before the lease is effected. 



*GloTer V. Henderson, 120 Mo. 367. 



Notice of Revocation. So far as the agent is concerned, 
the act of revocation becomes operative only from the time 
he has actual notice thereof; notice to third parties without 
notice to the agent will not effect a revocation as to the agent. 
Conversely, a notice only to the agent is not effective as to 
third parties. The acts of the agent in dealing with third 
parties without notice are binding on the principal. Whatever 
is sufficient to put an agent or third party on inquiry will 
serve as a legal notice of revocation. 

Notes: 

1. Either party may terminate a contract of agency 

at any time. 

2. Either party breaking a contract of agency for a 

specified period or undertaking without just cause 
is liable in damages. 

3. An agent who breaks his contract may be prevented 

during the term of the contract from taking em- 
ployment with a business competitor. 

§ 151. Termination by Disability 

An agent's authority is revoked by the death, insanity, 
or bankruptcy of his principal; in like manner the relation 
is destroyed by the death or disability of the agent. This is a 
principle of universal application. When a man dies, all con- 
tracts of agency cease at once; all powers of attorney, and 
every authority to anyone else to act for him are terminated. 
If in ignorance of his principal's death an agent did business 
for him, the business would be void and of no effect. 

A case which often happens is that of a person of ad- 
vanced years who gives personal property to an agent to 
deliver to someone else and then dies before the property 
has been turned over. In such cases the courts hold that the 
agency is revoked by the death of the principal, and the gift 
cannot take effect. 



/y 



3o8 



AGENCY 



TERMINATION OF AGENCY 



209 



In an Illinois case, Mrs. Trubey had her lawyer take from 
a bank vault a metal box of jewels and securities. She made 
parcels of these and designated to whom each parcel was to 
go. Then she put them in charge of her lawyer, but set no 
time for delivery. He receipted for them and placed them 
in another vault. Within three months Mrs. Trubey died. 
The matter came before the courts for adjudication. It went 
to the Supreme Court of Illinois, which held that the lawyer 
was undoubtedly Mrs. Trubey's agent to deliver the property; 
but when she died the agency was revoked by that fact, and 
that, as the property had not been delivered, it belonged to 
her estate and the people designated had no claim to it. The 
court expressed regret that it was not possible under the rules 
of law to give effect to what Mrs. Trubey evidently intended. 
It would seem that her lawyer was much at fault* 

The death of the agent also terminates the relation. When 
the relation of principal and agent is broken up by the sick- 
ness or other disability of the agent, the condition will 
be the same as when any other employee finds his term of 
employment broken by disability. In all such cases the general 
rule is that the agent or the employee is entitled to recover 
for the time he acted, whatever the services were worth to the 
principal or the employer. 

In a New York case it was held that when an agent is 
prevented by sickness or death from completing his contract, 
he or his executor is entitled to the vaJue of the services 
actually rendered.* 

Insanity of the principal has the same effect as death. If 
insane, a principal can no longer contract himself, and neither 
can he contract by an agent. The insanity of the agent 
terrtiinates the relation because he has no longer the capacity 
to represent his principal 



■Tmbey ▼. Pemte, 240 111. 513. 
• Wolfe ▼. Howes, ao N. Y. 197. 



The bankruptcy of the principal, and in some cases of 
the agent, would destroy the relation. In the case of bank- 
ruptcy, the bankrupt can no longer continue his business, but 
it is taken over by the court or the trustees in bankruptcy; 
and as he cannot do business himself he cannot do it through 
an agent. Insolvency would not have this effect. (See 
Chapter LXXXI.) 

If the principal parts with the subject matter, that ter- 
minates the agency. 

Notes: 

1. An agent can act only for a party who can act for 

himself. 

2. An agent's authority ends when the capacity of the 

principal to contract ends. 

3. An agent's incapacity to act ends the relation. 



§ 152. An Agent with an Interest 

An agency coupled with an interest cannot be revoked by 
the principal nor will his death or insanity revoke it. When 
the agent is also himself interested in the matter to he ac- 
complished, it places him in a di ffer ent relation to the prin- 
cTpal; ana tne prmcipal cannot at will destroy the relation^ 
It, loY instance, an agent is employed to jell a horse , and the 
agreement is that he is to advance the principal one-ha lf the 
price and pay himself when he sells the horse, the princip al 
cannot prevent him from selling the horse. The agent would 
have an TlTLeicsL hi LlrETnatter himself, and could go on and 
do that which he had agreed to do. 

The interest that causes a power of attorney to survive 
after death must be an interest in the subject matter of the 
agency and not in that which is produced by the exercise of 
the power. 



y 




I 

1 



2IO 



AGENCY 



Note: 



An agent with an interest in the property itself | \ V 
cannot be discharged, as he is to that extent a^ 



partner with the principal. 



Review Questions 

1. How may the contract of agency terminate? If an agent con- 

tinues to act after his engagement has ended, does he bind 
his principal? 

2. How is it possible to prevent an agent's going to work for a 

competitor when his engagement terminates? If the principal 
revokes the authority of his agent, who must be notified? 

3. What is the general rule as to the death or insanity of the 

principal? Why? What is the rule as to compensation when 
the contract is terminated by the death or disability of the 
agent ? 

4. What is the effect of bankruptcy ? Of insolvency ? What is the 

distinction between bankruptcy and insolvency? 

5. A borrowed money of B, giving B as collateral a power of 

attorney to collect certain rents. A died. Was B's power of 
attorney terminated? Is the tenant's obligation discharged 
by payment to B? 

6. What is the effect when an agent has an interest in the subject 

matter? Why? 



PART V 
NEGOTIABLE INSTRUMENTS 



ft 



CHAPTER XXVII 

FORM AND INTERPRETATION^ 

§ 153. The Quality of Negotiability 

The negotiable instruments in ordinary use are: (i) 
promissory notes, (2) drafts or bills of exchange, and (3) 
checks. In all the states that have adopted the Uniform Bills 
of Lading Act, bills of lading are made negotiable instruments. 
The quality of negotiability lies in the fact that any person, 
not an original party, who takes a negotiable instrument in 
the ordinary course of business, may sue on it when due, in 
his own name, and the person who is the obligor will be 
compelled to pay it. Negotiable instruments are also called 
"commercial paper." 

Any ordinary contract may be assigned by executing an 
assignment, but in such case the assignee merely steps into 
the shoes of the person who assigned it, and if there has been 
any reason, as between the parties, why it should not be paid, 
this can be set up against the assignee, if he brings suit, 
exactly as if he were the original party. If this were true 
of a note, no one would dare to discount it, for, when the 
time of payment came, any reason for non-payment that might 
exist between the original parties could be used to destroy 
the whole value of the note. Hence, for the convenience of 
business, the law of negotiable instruments has grown up, to 
protect the man who takes them "in due course of business." 

"In due course of business" means taken before its date 
for payment, for a valuable consideration and without knowl- 
edge of anything that would affect the title. The law says: 

»For forms of negotiable instruments, see Chapter CIII, Forms 34-43. 

213 



214 NEGOTIABLE INSTRUMENTS 

A holder in due course holds the instrument free from 
defect of title of prior parties, and free from any defenses 
available to prior parties among themselves and may enforce 
payment of the instrument for the full amount thereof 
against all parties liable thereon. 



Non-NegoHahle Contracts. A simple agreement or promise 
to pay a sum of money could not be enforced unless there 
was a valid consideration for the promise, and an assignee 
would have no more rights than the original holder. That is, 
if suit were brought on such an agreement, and the maker 
could prove that no consideration had been given, he would 
not be made to pay. The same rule would hold as between 
the original parties to a note, and the defense of no considera- 
tion would prevent collection, but if the note or other 
negotiable paper had been negotiated, that is, if it had passed 
in the course of business into the hands of an innocent holder 
for value, the matter of consideration would not figure, and 
the full amount would have to be paid. 

Notes, drafts, and checks are used so extensively that 
the laws governing their transfer are of great importance. 
WTien the subject of imiform laws was brought up, the law 
of negotiable instruments was the first to be reformed and 
the one most widely adopted. The Uniform Negotiable In- 
fitniments Law as devised by the commissioners having the 
work in hand has at the present time been adopted by every 
state and territory except Georgia and Porto Rico. 

In discussing this subject, the Uniform Negotiable In- 
struments Law has been followed as closely as possible, and 
the quotations are from the text of the law. 

. The following are the requirements for negotiable instru- 
ments as laid down in the law itself : 



§ I.— An instrument to be negotiable must conform to the 
following requirements : 



FORM AND INTERPRETATION 21$ 

• 1. It must be in writing and signed by the maker or 
drawer. 

2. Must contain an unconditional promise or order to 
pay a sum certain in money. 

3. Must be payable on demand, or at a fixed or determin- 
able future time. 

4. Must be payable to order or to bearer; and 

5. Where the instrument is addressed to a drawee, he 
must be named or otherwise indicated therein with reasonable 
certainty. 

§ 154. Signature 

The signer of an instrument is liable, and anyone signing 
a trade-name or assumed name will be liable personally. A 
duly authorized agent can sign for his principal, and if he is 
duly authorized and signs as agent or in a representative 
capacity, he will not be personally liable. If, however, he 
signs as agent without disclosing his principal, he will be 
personally liable. 

The indorsement of a corporation or an infant passes the 
property in the instrument, though the corporation or infant 
may not be liable. A note signea by a minor cannot be 
collected. 

A forged signature is absolutely void and passes no right 
or title. 



$ 155. Unconditional Promise 

The Uniform Law allows two variations of the require- 
ment of an unconditional promise or order to pay. 

§ 3. — ^An unqualified order or promise to pay is uncondi- 
tional within the meaning of this act, though coupled with: 

1. An indication of a particular fund out of which reim- 
bursement is to be made, or a particular account to be debited 
with the amount; or 

2. A statement of the transaction which gives rise to the 
instrument. 



ai6 NEGOTIABLE INSTRUMENTS 

But an order or promise to pay out of a particular fund is 
not unconditional. 

§ 156. Certainty as to Sum 

It is to be noted that the law allows certain variations as 
to the certainty of the sum: 

§ 2.— The sum payable is a sum certain within the mean- 
ing of this act. although it is to be paid: 

1. With interest; or 

2. By stated instalments; or 

3. By stated instalments, with a provision that upon de- 
fault in payment of any instalment or of interest, the whole 
shall become due; or 

4. With exchange, whether at a fixed rate or at the 
current rate; or 

5. With costs of collection or an attorney's fee, in case 
payment shall not be made at maturity. 

§ 157. Payable on Demand 

§ 7- — ^An instrument is payable on demand : 

1. Where it is expressed to be payable on demand, or at 
sight, or on presentation ; or 

2. In which no time for payment is expressed. 
Where an instrument is issued, accepted or indorsed when 

overdue, it is, as regards the person so issuing, accepting or 
indorsing it, payable on demand. 

§ 158. Certain Future Time 

The law clearly expresses that the time must be certaia 

§4.— An instrument is payable at a determinable future 
time, within the meaning of this act, which is expressed to 
be payable: 

1. At a fixed period after date or sight; or 

2. On or before a fixed or determinable future time 
specified therein; or 

3. On or at a fixed period after the occurrence of a 
specified event, which is certain to happen, though the time 
of happening be uncertain. 



FORM AND INTERPRETATION 217 

An instrument payable upon a contingency is not negoti- 
able, and the happening of the event does not cure the defect. 

§ 159. Payable to Order 

♦■ • 

§ 8. — The instrument is payable to order where it is 
drawn payable to the order of a specified person or to him 
or his order. It may be drawn payable to the order of: 

1. A payee who is not maker, drawer or drawee; or 

2. The drawer or maker; or 

3. The drawee; or 

4. Two or more payees jointly; or 

5. One or some of several payees; or 

6. The holder of an office for the time being. 
Where the instrument is payable to order the payee must 

be named or otherwise indicated therein with reasonable cer- 
tainty. 

§160. Payable to Bearer 

§ 9. — The instrument is payable to bearer : 

1. When it is expressed to be so payable; or 

2. When it is payable to a person named therein or 
bearer; or 

3. When it is payable to the order of a fictitious or non- 
existing person, and such fact was known to the person mak- 
ing it so payable; or 

4. When the name of the payee does not purport to be 
the name of any person ; or 

5. When the only or last indorsement is an indorsement 
in blank. 

§ 161. The Date 

The law pro\^ides that the date on the face of the instru- 
ment is presumed to be the true date, and that it may be ante- 
dated or post-dated, provided it is not done for a fraudulent 
purpose. It is also provided that if a date is left blank, any 
holder may insert the true date. If an instrument is issued 
with any material particular left out, the holder may fill in 
the blanks. 



2l8 



NEGOTIABLE INSTRUMENTS 



FORM AND INTERPRETATION 



219 



m 



A ncte dated on a legal holiday other than Sunday is valid. 
In New Jersey a contract, bill. note, or check drawn or made 
accepted or delivered, on Sunday is void. In Massachusetts 
a note or check made on Sunday is void as between the 
onginal parties. In Connecticut, a defense to an action on 
a note made on Sunday wiO be good if the consideration is 
restored. Both Massachusetts and Connecticut protect the 
bona fide holder of a note made, accepted or drawn on Sun- 
day. In New York a note dated and delivered on Sunday 

§ 162. Consideratioii 

AM negotiaMe paper is presumed to have been given for 
a valuable consideration, and everyone whose signature an- 
pears on it is presumed to have become a party for a valuable 
considerauon. Any consideration that would support an or- 
dinaiy contract will be sufficient. An existing debTwould be 
a good consideration for a note or draft in settlement 

.^^^n^J ^^"T ""^ ^^^"^i^^^^^n is not a good defense 
against a holder in due course for value. 

If a gambling debt has been paid widi a negotiable instru- 
ment, the maker can generaUy set up the defense of iDe^alitv 
only against the original party. In a few states, howVver 
gambling contracts are absolutely void, and there the maker 
of such an mstrument cannot be held, but the indorscr can 
inasmuch as an indorser warrants the legality of the instn/ 
ment 

Anymt having a Hen on a negotiable instrument, is a 
holder for value to the extent of his lien. 

§163. Delivery 

A negotiable instrument is incomplete until delivery If 
an incomplete instrument is completed and delivered without 
authonty of the maker or drawer, it wiU not be valid unless 



it comes in due course to an innocent holder for value, in which 
case it will be presumed conclusively to be good. 

§ 164. Rules of Construction 

§ 10. — The instrument need not follow the language of 
this act, but any terms are sufficient which clearly indicate an 
intention to conform to the requirements hereof. 

§ i7,_vv^here the language of the instrument is ambigu- 
ous, or there are omissions therein, the following rules of 
construction apply: 

1. Where the sum payable is expressed in words and also 
in figures and there is a discrepancy between the two, the 
sum denoted by the words is the sum payable; but if the 
words are ambiguous or uncertain, references may be had to 
the figures to fix the amount ; 

2. Where the instrument provides for the payment of in- 
terest, without specifying the date from which interest is to 
run, the interest runs from the date of the instrument, and 
if the instrument is undated, from the issue thereof ; 

3. Where the instrument is not dated, it will be consid- 
ered to be dated as of the time it was issued ; 

4. Where there is a conflict between the written and 
printed provisions of the instrument, the written provisions 
prevail ; 

5. Where the instrument is so ambiguous that there is 
doubt whether it is a bill or note, the holder may treat it as 
either at his election; 

6. Where a signature is so placed upon the instrument 
that it is not clear in what capacity the person making the 
same intended to sign, he is to be deemed an indorser ; 

7. Where an instrument containing the words "I promise 
to pay" is signed by two or more persons, they are deemed to 
be jointly and severally liable thereon. 

§165. Allowable Provisions 

1 5. — An instrument which contains an order or promise 
to do any act in addition to the payment of money is not 
negotiable. But the negotiable character of an instrument 
otherwise negotiable is not affected by a provision which : 



220 NEGOTIABLE INSTRUMENTS 

1. Authorizes the sale of collateral securities in case the 
instrument be not paid at maturity; or 

2. Authorizes a confession of judgment if the instrument 
be not paid at maturity; or 

3. Waives the benefit of any law intended for the advan- 
tage or protection of the obligor; or 

4. Gives the holder an election to require something to 
be done in lieu of payment of money. 

But nothing in this section shall validate any provision 
or stipulation otherwise illegal. 

§ 166. Non-Essentials 

§ 6. — The validity and negotiable character of an instru- 
ment are not affected by the fact that: 

1. It is not dated; or 

2. Does not specify the value given, or that any value 
has been given therefor; or 

3. Does not specify the place where it is drawn or the 
place where it is payable ; or 

4. Bears a seal ; or 

5. Designates a particular kind of current money in 
which payment is to be made. 

But nothing in this section shall alter or repeal any statute 
requiring in certain cases the nature of the consideration to 
be stated in the instrument. 



I. 



3- 
4. 

5. 



Review Questions 

Give a succinct but clear idea of commercial paper. If the 
assignee of an ordinary contract has to bring suit to enforce 
it, what may happen? What is meant by "due course of 
business" ? 

What are the five requirements for negotiable instruments? 

What are the usual negotiable words? 
How should an agent sign a note? 

What effect has a minor's note? A minor's indorsement? 
Would a note payable from "rents for March, 1919, from the 

maker's apartment house. No. 154 Clinton Avenue, Baltimore, 

Maryland," be negotiable? 



FORM AND INTERPRETATION 



221 



10. 



6. Is a note payable in instalments good? Is a note good that 

adds costs of collection? 

7. Would a note payable ninety days after the death of the maker 

be negotiable? What if it were payable ninety days after 
the payee came of age? 

8. Is a note with no time expressed good? 

g. Is a note or a check invalidated if dated on a legal holiday? 

Dated on Sunday? Explain fully. 
A affixes his signature to a blank paper and delivers it to B 

for the purpose of converting it into a negotiable note. B 

writes a larger amount and a shorter time than agreed on. 

Is A liable to a holder in due course without notice? 
C pays a note that apparently bears his signature as maker. 

Later he finds that the signature was forged. May he recover 

the money paid? State the principle. 
A bank discounts a note having a genuine indorsement, but 

forged signature of maker. Who bears loss? 

13. If in a note there is a conflict between words and figures as to 

sum payable, what prevails? As between printed words and 
written words which prevails? 

14. Is it necessary that a note or a bill should contain the words 

"value received" ? That it should be dated? 

15. What provision can be made in a note as to the sale of collateral 

securities? What are "collateral securities"? 



II. 



12. 






CHAPTER XXVIII 

NEGOTIATION^ 

§ 167. Method of Negotiation 

§ 30. — An instrument is negotiated when it is transferred 
from one person to another in such manner as to constitute 
the transferee the holder thereof. If payable to bearer it 
is negotiated by delivery ; if payable to order it is negotiated 
by the indorsement of the holder completed by delivery. 

§ 31. — The indorsement must be written on the instrument 
itself or upon a paper attached thereto. The^ signature of 
the indorser, without additional words, is a suflBcient in- 
dorsement. 

§32. — ^The indorsement must be an indorsement of the 
entire instrument. An indorsement, which purports to trans- 
fer to the indorsee a part only of the amount payable, or 
which purports to transfer the instrument to two or more in- 
dorsees severally, does not operate as a negotiation of the in- 
strument But where the instrument has been paid in part, 
it may be indorsed as to the residue. 

§ 168. The Indorser's Contract 

The contract of any one who indorses negotiable instru- 
ments is that he warrants to all subsequent holders in due 
course : 

1. That the instrument is genuine. 

2. That he has good title to it. 

• 3. That all prior parties had capacity to contract. 
4. That the instrument is, at tiie time he indorses it, 
valid and subsisting. 



NEGOTIATION 



223 



* For f oniif of indorsement, see Chapter CIII, Forms $6, 44. 

323 



He also warrants that on presentment when due it will 
be accepted or paid or both according to its tenor, and that 
if it be dishonored and the necessary protest and notice be 
given, he will pay the amount thereof to the holder or to any 
subsequent indorser who may have to pay it. 

§ 169. Blank or Special Indorsement 

§ 33. — An indorsement may be either special or in blank ; 
and it may also be either restrictive or qualified, or con- 
ditional. 

§ 34. — A special indorsement specifies the person to whom, 
or to whose order the instrument is to be payable; and the 
indorsement of such indorsee is necessary to the further 
negotiation of the instrument. An indorsement in blank 
specifies no indorsee, and an instrument so indorsed is pay- 
able to bearer, and may be negotiated by delivery. 

§35. — The holder may convert a blank indorsement into 
a special indorsement by writing over the signature of the 
indorser in blank any contract consistent with the character 
of the indorsement. 

§ 170. Restrictive Indorsement 

^36. — An indorsement is restrictive, which either: 

1. Prohibits the further negotiation of the instrument; or 

2. Constitutes the indorsee the agent of the indorser ; or 

3. Vests the title in the indorsee in trust for or to the 
use of some other person. 

But the mere absence of words implying power to negoti- 
ate does not make an indorsement restrictive. 

§ 37. — A restrictive indorsement confers upon the indorsee 

the right: 

1. To receive payment of the instrument; 

2. To bring any action thereon that the indorser could 

bring; 

3. To transfer his rights as such indorsee, where the 
form of the indorsement authorizes him to do so. 

But all subsequent indorsees acquire only the title of the 
first indorsee under the restrictive indorsement. 



H 



224 



NEGOTIABLE INSTRUMENTS 



I' 



§ 171* Qualified Indorsement 

§38.— A qualified indorsement constitutes the indorser a 
mere assignor of the title to the instrument. It may be made 
by adding to the indorser's signature the words "without re- 
course" or any words of similar import. Such an indorse- 
ment does not impair the negotiable character of the instru- 
ment. 

§ 172. Conditional Indorsement 

The payee is not concerned about a conditional indorse- 
ment. Such an indorsement affects the rights of only those 
who take the instrument after the indorsement. A conditional 
indorsement imposes some condition on payment, as "Pay to 
Henry Alford upon delivery of motor truck, on March I, 
1920. Mark Anderson." 

In such a case, the payee may take no notice of the condi- 
tion and may pay any lawful holder of the note whether the 
condition has been fulfilled or not. But any holder of such 
a note would hold it. or any amount paid him upon it, subject 
to the rights of the conditional indorser. 

§ 173. Effect of Indorsement 

* 

An instrument payable to bearer may be indorsed specially 
to some particular person and after that may again be passed 
on by delivery. 

§41.— Where an instrument is payable to the order of 
two or more payees or indorsees who are not partners, all 
must indorse, unless the one indorsing has authority to in- 
dorse for the others. 

§42.— Where an instrument is drawn or indorsed to a 
person as "cashier" or other fiscal officer of a bank or cor- 
* poration, it is deemed prima facie to be payable to the bank 
or corporation of which he is such officer; and may be 
negotiated by either the indorsement of the bank or corpora- 
tion or the indorsement of the officer. 



NEGOTIATION 

§ 43- — Where the name of a payee or indorsee is wrongly 
designated or misspelled, he may indorse the instrument as 
therein described, adding, if he think fit, his proper signature. 

§ 44. — Where any person is under obligation to indorse in 
a representative capacity, he may indorse in such terms as 
to negative personal liability. 

§ 45. — Except where an indorsement bears date after the 
maturity of the instrument, every negotiation is deemed 
prima facie to have been effected before the instrument was 
overdue. 

§46. — Except where the contrary appears every indorse- 
ment is presumed prima facie to have been made at the place 
where the instrument is dated. 



225 



Review Questions 

1. What is the difference between assigning a simple contract, and 

negotiating a note or other commercial paper? What is the 
form? 

2. What is a contract of indorsement? What obligation is assumed 

by the indorser? 

3. If an instrument payable to bearer is indorsed specially to some 

particular person and after that is passed on by delivery, can 
the holder by delivery collect from the special indorser or the 
special indorsee? 

4. Give pro forma illustrations of the following indorsements of 

promissory notes and show the purpose and effect of each 
indorsement: (a) in full, (b) conditional, (c) restrictive, (d) 
qualified. 

5. What is the procedure where the name of a payee or indorsee 

has been misspelled or his initials are not given correctly? 



I! 



I i* 









CHAPTER XXIX 

RIGHTS OF HOLDER 
§ 174. Holder in Due Course 

The Uniform Negotiable Instruments Law uses the phrase 
"a holder in due course" to express the idea of an innocent 
holder for value, that is, one who has taken the instrument 
without knowledge of anything unusual in connection with 
it and who has given a valuable consideration for his tiUe. 
Such a holder of a negotiable instrument may sue on it in 
his own name. 

§ 52— A holder in due course is a holder who has taken 
the instrument under the following conditions : 

1. That it is complete and regular upon its face; 

2. That he became the holder of it before it was over- 
due, and without notice that it had been previously dis- 
honored, if such were the fact; 

3. That he took it in good faith and for value; 

4. That at the time it was negotiated to him he had no 
notice of any infirmity in the instrument or defect in the title 
of the person negotiating it. 

§53.— Where an instrument payable on demand is ne- 
gotiated an unreasonable length of time after its issue, the 
holder is not deemed a holder in due course. 

554.— Where the transferee receives notice of any in- 
firmity in the instrument or defect in the title of the person 
negotiating the same before he has paid the full amount 
agreed to be paid therefor, he will be deemed a holder in 
due course only to the extent of the amount theretofore paid 
hy him. 

326 



RIGHTS OF HOLDER 227 

1 175. Defects of Title 

§ 55. — The title of a person who negotiates an instrument 
is defective within the meaning of this act when he obtained 
the instrument, or any signature thereto, by fraud, duress, 
or force and fear, or other unlawful means, or for an illegal 
consideration, or when he negotiates it in breach of faith, or 
under such circumstances as amount to a fraud. 

§ 56. — ^To constitute notice of an infirmity in the instru- 
ment or defect in the title of the person negotiating the same, 
the person to whom it is negotiated must have had actual 
knowledge of the infirmity or defect, or knowledge of such 
facts that his action in taking the instrument amounted to 
bad faith. 

§ 176. The Rights of a Holder in Due Course 

A holder in due course of a negotiable instrument is in a 
strong position. He has a good claim against any of the 
prior parties to the instrument regardless of any claim they 
may have for fraud, duress, lack of consideration, and, with 
a few exceptions, illegality. Of course, if the holder knew 
of any of these defects before taking the instrument, he would- 
not be a holder in due course. If he occupies the position of 
, holder in due course, he may take any negotiable instnunent 
without inquiry and without any fear that in the event of 
having to bring suit he may meet with any of the defenses 
named. 

1 57. — ^A holder in due course holds the instrument free 
from any defect of title of prior parties and free from de- 
fenses available to prior parties among themselves, and may 
enforce payment of the instrument for the full amount there- 
of against all parties liable thereon. 

§ 177. Effect of Irregular Transfer 

If a holder of negotiable paper not "a holder in due 
course" brings suit to collect, he must face all the defenses 



f 



'111 



|ill 



228 



NEGOTIABLE INSTRUMENTS 



tibat can be brought up in a suit between the original parties. 
There may have been fraud as between the original parties 
or other cause why the note should not be paid. If it has 
come into the hands of an innocent holder, he can collect 
notwithstanding, but if the holder did not take the instrument 
m due course, any of the defenses existing between the original 
parties may be used against him. 

§97-— In the hands of any holder other than a holder in 
due course, a negotiable instrument is subject to the same 
defenses as if it were non-negotiable. But a holder who 
derives his title through a holder in due course, and who is 
not himself a party to any fraud or illegality affecting the 
instrument, has all the rights of such former holder in respect 
of all parties prior to the latter. 

If negotiable instruments payable to bearer are lost, the 
finder does not have good title, but if he manages to transfer 
them to an innocent holder for value, such holder has a good 
title. This rule does not apply to certificates of stock or other 
instruments that are only quasi-negotiable. 



Review Questions 



1. 



What IS a "holder in due course"? If a person takes an undated 
note, IS he a holder in due course? If a note is overdue, will 
an indorsee be a holder in due course? If the indorsee pays 
only half the face of the note, will he be a holder in due 
course ? 

2. Distinguish the position of a bona fide holder of a negotiable 

instrument and an assignee of an assignable obligation in the 
event of their suing for their respective claims. 

3. An indorsee who has notice of illegality of note indorses it to a 

bona fide holder for value, and takes up the note at maturity 
Is he entitled to sue maker? 
4- If A lost bearer bonds and certificates of stock indorsed in blank, 
and C took them from the finder in good faith, paying value' 
what interest would C have? 



CHAPTER XXX 

LIABILITY OF PARTIES 

§ 178. Liability of Maker 

The maker of a promissory note engages to pay the note 
he issues according to its tenor and effect, and he is primarily 
liable. Should it be paid by one of the indorsers, the maker 
will later have to reimburse him for what he has paid. The 
maker is liable even if the note is not presented to him when 
due. He remains liable upon it until it is outlawed by the 
Statute of Limitations. He is not liable on a forged instru- 
ment or on an incomplete instrument lost or stolen and filled 
out by the finder or thief. 

§ 34. — ^Where an incomplete instrument has not been de- 
livered it will not, if completed and negotiated without 
authority, be a valid contract in the hands of any holder, 
as against any person whose signature was placed thereon 
before delivery. 

§ 42. — ^Where a signature is forged or made without au- 
thority of the person whose signature it purports to be, it is 
wholly inoperative, and no right to retain the instrument, 
and to give a discharge therefor, or to enforce payment 
thereof against any party thereto, can be acquired through 
or under such signature, unless the party against whom it is 
sought to enforce such right is precluded from setting up the 
forgery or want of authority. 

§ 179. Liability of Indorser 

When any person other than maker, drawer, or acceptor 
places his signature upon an instrument he is deemed to be 
an indorser. 

229 



<i ' i> 



m 



230 



NEGOTIABLE INSTRUMENTS 



l« 




§64.— Where a person, not otherwise a party to an in- 
strument, places thereon his signature in blank before de- 
hvery, he is liable as indorser in accordance with the foUow- 
ing rules : 

1. If the instrument is payable to the order of a third 
person, he is liable to the payee and to all subsequent parties. 

2. If the instrument is payable to the order of the maker 
or drawer, or is payable to bearer, he is liable to all parties 
subsequent to the maker or drawer. 

3. If he signs for the accommodation of the payee he is 
liable to all parties subsequent to the payee. 

§ 65.— Every person negotiating an instrument by delivery 
or by a qualified indorsement, warrants : 

1. That the instrument is genuine and in all respects 
what it purports to be; 

2. That he has a good title to it ; 

3. That all prior parties had capacity to contract; 

4. That he has no knowledge of any fact which would 
impair the validity of the instrument or render it valueless. 

§ 67.— Where a person places his indorsement on an in- 
strument negotiable by delivery he incurs all the liabilities 
of an indorser. 

The contract of the indorser, like that of the drawer, is 
a conditional promise to pay. The conditions are that the 
prior parties fail to pay and that due notice of their failure 
be given. 

The amount of the indorser's liability is the face of the 
instrument, and in addition, interest and notary's protest fees. 

Indorsers are liable in the order in which they indorse, 
but evidence may be admitted to show that they have agreed 
otherwise as between or among themselves. 

§ x8o. Discharge of Indorser 

If the holder and maker agree to an extension of the 
time of payment, it will discharge any indorsers of the instru- 



LIABILITY OF PARTIES 



231 



ment. Mere delay in bringing suit does not have this effect. 

As set forth in subsequent chapters, failure to present the 
note for payment on the due date will discharge the indorsers, 
and if the note is presented for payment and not paid, the 
indorsers must be duly notified if they are to be held. 

§ z8z. Liability of Guarantor 

If instead of the usual indorsement or indorsement in 
blank, a guaranty is made, as, "For value received, I hereby 
guarantee payment of within note, Warren Colwell," the effect 
is that the guarantor waives the usual presentment and notice 
of non-payment. 

Some courts hold that this contract of guaranty is not 
strictly negotiable and will not pass to any but the next holder. 
The usual form of indorsement is in most cases preferable. 
A guarantor of collection instead of payment is liable only 
if the maker is sued promptly and then cannot by legal means 
be made to pay. 

§ 182. Liability of Accommodation Signer 

Accommodation paper is distinguished from business paper 
by lack of consideration. Thus a man may give his note to 
a friend, in order that the latter may discount it and so 
secure funds to meet a temporary emergency. In the same 
way he may write his acceptance upon a draft (see § 205), 
or indorse a note made by a friend in need of funds. The 
distinction is often made between real instruments and ac- 
commodation paper that the former represent past and the 
latter future transactions. In the first case, a man gives a 
note for goods received ; in the second, he indorses a note in 
order that its maker may receive goods. 

Since the one who is accommodated is not a holder for 
value, he cannot sue upon accommodation paper. But anyone 
who for accommodation signs his name to any negotiable 



I 



2^2 



NEGOTIABLE INSTRUMENTS 



lolTT.!, '%'""''";' '*''""• "'"P**'^' °^ •"''•'«^^. '« liable 
to any holder for value. The accommodation signer is liable 

Z. rf f.' '°''" '"''"^ *^^ '^^ ^'^^^ forTccommoda! 
tion and that he received no value. But an accommodation 
signer is never liable to the party accommodated. 



Review Questions 



Jk# 



& 



°of t?*- 'h '"'''*''' T •'""" '" ''"^ '°"'^' o* '^^ '"»'^er and 
of the mdorser of a promissory note 

* ^f thU f' ''^'^' °' indorsement of a negotiable instrument 
m this form, "Henry Baldwin, without recourse"' 

^ tL Mf '" '"f u'" """' "'■'" *"*= '"="'" '>«~'"« insolvent 
<L ma» !' ' ""; .""t "''''*°" *°^ 50 cents on the dollar? 
4. What action of the holder will discharge an indorser? What 
steps must be taken to hold indorsers ? 

which he sells to B. Then A gets the grain by misrepre- 
senution from the warehouseman and sells to C Would B 
have any claim on C? What rights would B have? 
ii^one?? " ^"^"'"^ °* "^eof'Me paper differ from an 

7- The holder of a demand note agreed that he would not transfer 

he note Or put it in the bank for collection, but would hold 

It till such time as he wanted the money, and would then 

make demand for it. Upon this the defendant, at the maker's 

request, indorsed the note. The plaintiff forbore suit for over 

l^^Ived" '' '"' "'°"" "'""' ^"^'^ ** •'«»' P"''-P''= 
& Directors of a company indorse its note to enable it to make 
a loaa The note is paid by the first indorser. What claim 
for indemnity has he against the subsequent indorsers? 
9. A signs what he thinks is a subscription blank for a' set of 
books, in reality the paper is a cleverly contrived promissory 
note. This note is negotiated. It passes into the hands of 
a purchaser for value. In your state can this holder force 
the maker to pay the note? 



LIABILITY OF PARTIES 



233 



10. B is induced to buy an automobile by false representation. He 

gives a note in part payment. When he finds that he has 
been defrauded, he notifies the payee that he will not pay 
the note, but meanwhile the payee has negotiated the note to 
another, who is an innocent purchaser for value. Can the 
latter force B to pay the note? 

11. C dates a check and signs his name, but does not fill out the 

other spaces. The check is stolen and filled out by the thief. 
It passes into the hands of an innocent party who pays value. 
Will that party be able to collect the check from C? 







5 

II 



CHAPTER XXXI 

PRESENTMENT FOR PAYMENT 
§ 183. Necetsity of Presentment 

The maker or acceptor of a negotiable instrument is liable 
without presentment for payment, but if the drawer and in- 
dorsers are to be held, it must be presented for payment 

r.J'TT'^^'^'''' ^ "^"^^ ^" ^^ ^"^ ^^'^ ^cept in the 
case of demand paper which must be presented within a 

reasonable time. "Days of grace" were three extra days which 

were formerly aUowed for the payment of commercial paper. 

§ 184- Requirements for Presentment 

madef *'~^'^'^"*"'*'"* ^""^ Payment, to be sufficient, must be 

1. By the holder, or by some person authorized to re- 
ceive payment on his behalf; 

2. At a reasonable hour on a business day; 
3- At a proper place as herein defined • 

if ht ulu'^\^''^ ^"""^'"^ "^*^^" °" '^^ instrument, or 
if he IS absent or inaccessible, to any person found at the 
place where the presentment is made. 

place^*"^"'^^'"*'"* ^°'' ^^'"''"* '' '"*''*^ *^ ^^"^ P«>P«'" 

m J; anTr 1^^^'' ""^ P'^'"' '' '^^'^^ ^'^ the instru- 
ment and It IS there presented; 

drl n^^"'* "*" ^^"""^ °^ ^^'"'""^ '' ^P^^^^fi^^* but the ad. 

- mZl lU . ^T '"^ '"^^ P*^'"^"^ " ^^^« '» the instni- 
ment and it is there presented; 

3. Where no place of payment is specified and no address 
IS given and the instrument is presented at the usual Se 
of business or residence of the person to make payment 

«34 



PRESENTMENT FOR PAYMENT 23$ 

4. In any other case if presented to the person to make 
payment wherever he can be found, or if presented at his 
last known place of business or residence. 

§74. — The instrument must be exhibited to the person 
from whom payment is demanded, and when it is paid must 
be delivered up to the party paying it. 

If the instrument is payable at a bank, presentment must 
be made during banking hours imless payee has no funds 
there, in which case any hour before the closing of the bank 
will do. If the bank holds such a note for collection and it 
is in the bank on its due date, no other presentment is necessary. 

Speaking generally, it is the bank^s duty to use all diligence 
in respect to negotiable paper left with it for collection. This 
involves prompt presentation for acceptance if acceptance is 
necessary ; and presentation for payment on the date of pay- 
ment within banking hours, at the place specified in the instru- 
ment, if any, and if not, at the maker's place of business. 
In case the instrument is not paid on presentation when due, 
it is the bank's duty to protest it, if not otherwise instructed 
by the owner, and to give due notice of its dishonor to all 
indorsers, and to do any other things necessary for the col- 
lection of the instrument. The bank is liable for any failure 
in its performance of its duty. 

§ Z85. Presentment Excused 

§ 82.— Presentment for payment is dispensed with : 
• I. Where, after the exercise of reasonable diligence pre- 
sentment as required by this act cannot be made; 

2. Where the drawee is a fictitious person ; 

3. By waiver of presentment, express or implied. 

§ z86. When Due 

§ 85. — ^Every negotiable instrument is payable at the time 
fixed therein without grace. When the day of maturity falls 
upon Sunday or a holiday, the instrument is payable on the 



I 



wm 



i* 



236 



NEGOTIABLE INSTRUMENTS 



n«rt succeeding business day. Instruments falling due on 
Sanrday are to be presented for payment on the nex" su" 
ceedmg busmess day. except that instruments payable o„de 
mand may. at the option of the holder, be present^ W 
payment before twelve o'clock noon „„ c . Presented for 
entire day is not a honda^ '' "''" *•"' 

aftefdail^r *! '"'*™"^"* ''' P^'y""' « « Axed period 

"e d^ofttr """^ '° ■-- '^ - - •>' '^^^^^^^^ 

If an instrument is due a month or more after date a 
calendar month is meant A note dated Februar^ 6 and due 
a month from date win fall due on March 16 wheAerIn 
leap year or any other year. wnemer m 



Review Questions 



I. 



2» 



What were "days of grace" as understood in the law relating to 
commercial paper? reianng to 

4. A note held by the bank at which it is payable is not paid at 
matunty. Must there be a presentment and demand ofjay 

^' ""TsZ'^^let'Jj '5 ^^r""'^ P^P^^ determined? .What 

6. Hnw i" ^i "^"^ ^''" ^""' ^'^ ^ '^^^^^^y ? On a Saturday ? 

tx How should presentment be made? ^"ru«iy. 

^* ^^Jnt'^' ™''^'^ ""^ ^'''P'°' "^^^^ *^^^" ^^^"gh the instrument 
IS not presented on the due date ^ «ruinent 

a^ Would it be proper under any circumstances to present a note 

o If th' 'T'"' '' ''\'"''"' ^^^ "^^ ^^^^-^ -Jong the street 
9. I^ tJ>« niaker cannot be found, what is the situation? 



CHAPTER XXXII 
NOTICE OF DISHONOR 

§ 187. Necessity of Notice 

§ 89. — Except as herein otherwise provided, when a nego- 
tiable instrument has been dishonored by non-acceptance or 
non-payment, notice of dishonor must be given to the drawer 
and to each indorser, and any drawer or indorser to whom 
such notice is not given is discharged. 

The holder must give notice. If the note has been left 
with a bank for collection, it as agent for the holder would 
give notice. If the note has been given to a notary for protest, 
he usually gives the required notice. 



§ 188. Effect of Notice 

1 92. — ^Where notice is given by or on behalf of the holder, 
it enures for the benefit of all subsequent holders and all 
prior parties who have a right of recourse against the party 
to whom it is given. 

§ 93.— Where notice is given by or on behalf of a party 
entitled to give notice, it enures for the benefit of the holder 
and all parties subsequent to the party to whom notice is 
given. 

§189. Form of Notice 

The notice may be informal provided it is so clear as not 
to mislead the party to whom it is sent. It may even be oral. 
It may be delivered personally or by mail. It may be given 
to the party or to someone acting as his authorized agent 

337 



*4 



4ii 



i 



li 




II 
II 



238 



NEGOTIABLE INSTRUMENTS 



§ X90. Time of Notice 

Where both parties reside in the same place, the time when 
notice must be given is as follows: 

§ 103.— I. If given at the place of business of the person 
to receive notice, it must be given before the dose of business 
hours on the day following; 

2. If given at his residence, it must be given before the 
usual hours of rest on the day following; 

3. If sent by mail, it must be deposited in the post-office 
m time to reach him in usual course on the day following. 

If the parties reside in different places, the rule is as 
follows: 

§ 104.— I. If sent by mail, it must be deposited in the 
post-office in time to go by mail the day following the day of 
dishonor, or if there be no mail at a convenient hour on 
that day, by the next mail thereafter. 

a. If given otherwise than through the post-office, then 
within the time that notice would have been received in due 
course of mail, if it had been deposited in the post-office 
within the time specified in the last subdivision. 

Where a notice is duly deposited in the post-office, within 
the specified time, it is deemed a good notice, whether or not 
It reaches its destinatioa 

The party receiving notice is aflowed the same period of 
time to send notice to antecedent parties that was permitted 
to the last holder. 

§ 191. Where to Send Notice 

If the party has given an address, notice should be sent 
there; otherwise — 

§ 108.— I. Either to the post-office nearest to his place 
of residence, or to the post-office where he is accustomed to 
receive his letters; or 



KbtlCE OF DISHONOR 239 

2. If he lives in one place, and has his place of business 
in another, notice may be sent to either place; or 

3. If he is sojourning in another place, notice may be 
sent to the place where he is so sojourning. 

But where the notice is actually received by the party 
within the time specified in this act, it will be sufficient, 
though not sent in accordance with the requirements of this 
section. 

Delay in giving notice is excused when caused by circum- 
stances beyond the control of the holder. 

§ 192. When Notice Is Not Required 

Notice of dishonor is not required to be given to the drawer 
in the following cases: 

H 114. — I. Where the drawer and drawee are the same 

person ; 

2. Where the drawee is a fictitious person or a person 
not having capacity to contract; 

3. Where the drawer is the person to whom the instru- 
ment is presented for payment; 

4. Where the drawer has no right to expect or require 
that the drawee or acceptor will honor the instrument; 

5. Where the drawer has countermanded payment. 

§ 193. Protest 

A protest is practically a certificate by a notary that the 
instrument has been presented, a demand for payment made, 
and such demand refused, and that the notary has protested 
against such non-payment and has sent notice of such protest 
and non-payment to the party concerned. This is followed 
by the official signature and seal of the notary. The object 
of protest is to hold those secondarily liable. The acceptor 
of a draft and the maker of a note, are principal debtors and 
are held with or without protest. 

Foreign bills of exchange must always be protested, as 



240 



NEGOTIABLE INSTRUMENTS 




^ 



I I 



•i| 




the notary's certificate is the only admissible evidence of the 
bill's dishonor. 

In case a bank protests a draft ahead of time, it is liable 
to the acceptor for injury to his credit 

Any negotiable instrument may be protested for non-ac- 
ceptance or non-payment, but such procedure is not legally 
required, except for foreign bills of exchange. The costs 
of a protest are added to the amount to be paid by any party 
liable on the instrument. Fees for protest are fixed by statute. 
Protest is advisable, as the notary will send the required notice 
and put the evidence of non-payment and due notice in the 
best possible- shape for use, if htigation results. 

If it is desired to avoid the expense of protest, it is 
necessary to attach notice of "No Protest" to any instrument 
sent through a bank for collection, otherwise the bank will 
give its notaries a chance to make fees. 



2. 

3- 



Review Questions 

Notice of dishonor is to be given by whom? To whom must 

notice be sent? 
What is the effect if notice is not given? 
What is the rale as to the time of notice: (a) Where the parties 

live in the same place? (b) Where they reside in different 

places ? 

4. If notice was sent by mail and owing to a train wreck the letter 

was destroyed, would the person to be notified be released? 

5. Who pays the cost of protest? What does the term "protest" 

mean ? 

6. E holds an unpaid note and gives due notice to fourth indorser, 

who gives due notice to second indorser, who gives due notice 
to first and third. Who are liable to E? 
7. ' What form of negotiable instruments legally require protest and 
for what defaults? 



CHAPTER XXXIII 

DISCHARGE OF NEGOTIABLE INSTRUMENTS 

§ 194. When Discharged 

A negotiable instrument is discharged : 

1 119. I. By payment in due course by or on behalf of 

the principal debtor ; 

2. By payment in due course by the party accommodated, 
where the instrument is made or accepted for accommoda- 
tion; 

3. By the intentional cancellation thereof by the holder; 

4. By any other act which will discharge a simple con- 
tract for the payment of money; 

5. When the principal debtor becomes the holder of the 
instrument at or after maturity in his own right. 

A person secondarily liable on the instrument is dis- 
charged: 

1 120. I. By an act which discharges the instrument; 

2. By the intentional cancellation of his signature by 

the holder; 

3. By the discharge of a prior party ; 

4. By a valid tender of payment made by a prior party. 

Also by release of the principal debtor or by extension of 
his time of payment. Merely letting the time of payment go 
by without beginning suit is not granting an extension. 

§ 195. When Not Discharged 

When paid by a party other than the maker or drawee, 
the instrument is not discharged, but the party paying it may 
enforce payment against all prior parties on the instrument. 

241 



Ill 



I 1 



242 



NEGOTIABLE INSTRUMENTS 




§196. Effect of Alteration 

Any material alteration, unless made with the assent of 
aU parties concerned, will invalidate the instrument, except 
as agamst the parties who made the alteration. 

Any alteration is material which changes : 

§125.-1. The date; 

2. The sum payable, either for principal or interest; 

3. The time or place of payment; 

4. The number or the relations of the parties; 

5. The medium or currency in which payment is to be 
made; 

Or which adds a place of payment where no place of 
payment ,s specified, or any other change or addition which 
alters the effect of the instrument in any respect, is a 
material alteration. 



Review Questions 

How is liability of indorser affected when maker and holder 

agree to extend time of payment? 
If an indorser pays a note to avoid suit, what rights has he^ 
An mstrument which has been materially altered is in due course 

in the hands of a holder not a party to the alteration. May 

he enforce payment according to original tenor .^ 
What alterations in negotiable instruments are material? 
A negotiable note executed and delivered by A to B passes in 

due course to and is indorsed in blank by B, C, D, and E. 

• 1 i-^m'* ^'"^^^ """^ '*"^^" °"^ ^^' indorsement. What 
IS the liability of C, D, and E ? 

6. Under what circumstances is an indorser relieved from liabilitv 
as such? •' 



3. 



4. 

5» 



I. 
2. 

3- 

4, 



CHAPTER XXXIV 

PROMISSORY NOTES 

§ 197. Definition 

A note is described and defined by the Uniform Negotiable 
Instmments Law as follows : 

It is a written promise without condition, 
By the maker to another, or to the maker's order, 
To pay a sum certain in money to order or to bearer, 
On demand at a fixed or determinable future time. 

I lg4. — A negotiable promissory note within the meaning 
of this act is an unconditional promise in writing made by 
one person to another, signed by the maker, engaging to 
pay on demand or at a fixed or determinable future time a 
sum certain in money to order or to bearer. Where a note 
is drawn to the maker's own order, it is not complete until 
indorsed by him. 

§ 198. Liability of Maker 

The liability of the maker of a promissory note may vary 
in nine different ways as follows: * 

I. Where the note is signed with his name by another 
at his direction, he is liable in the same manner 
as though he had personally signed the note. 

3. Where he signs and delivers the note without con- 
sideration to the party who seeks to enforce it, 
he is not liable if he raises the question and prop- 
erly makes the defense of lack of consideration. 



»C. p. A. Problems. Vol. I, page 235- This differentiation <5f liability is far- 
fetched and even fantastic. It is brought in here only because required to answer 
a question actually asked. 



a44 




^ 



4- 



6. 



NEGOTIABLE INSTRUMENTS 

Where he signs and delivers the note without con- 
sideration and it subsequently comes into the hands 
of a holder in due course, he is liable. 

Where his signature is forged by the party who seeks 
to enforce it, he is not liable. 

Where his liability is sought to be enforced by one 
to whom It was negotiated for value by the party 
forging his signature, he niay set up that the in- 
strument was forged even against a holder in due 
course. 

Where the instrument sued on is not dated, does not 
state that it is given for value, and does not 
specify the place where it is drawn or the place 
where it is payable, he is liable. 

Where the holder of the note has, without the assent 
of the maker, changed its date, he is not hable 
on the note either in its present or its original 
form. Alteration of date is a material alteratioa 
Where the holder of the note has, without the assent 
of the maker, changed its place of payment, he is 
not hable. Place of payment is a material term 
of the note. 

Where the holder of the note has muntentionaUy 
marked it canceUed, he is liable, provided the 
holder can prove that the canceUation was unin- 
tentional. The burden of proof is on the holder. 



§ 199- Interest 

The holder of a note on which interest is payable at fixed 
periods need not protest or take any action in case of default 
of interest payments. He may simply wait mitil the principal 
is due and then proceed to collect the whole amount of L 
note. 



PROMISSORY NOTES 



245 



a 



The legal rate of interest at the place where payment is 
to be made will determine the rate if not specified in the 
note. 

§20o. Demand Notes 

If an indorser on a demand note is to be held, payment 
must be demanded within a reasonable time; the maker will 
be bound even if demand is not made for a very long time. 
The only limitation protecting the maker is that imposed by 
the Statute of Limitations. It is held that the statute begins 
to run from the time a cause of action accrues. In the case 
of a demand note, this is from the time the note is delivered 
by the maker to the payee. 

§ 201. Effect of Renewal 

If a new note is taken in exchange for an unpaid one, 
it operates only as a suspension of the old debt, not as an 
extinguislmient of it, unless by special agreement. In case 
the new note is not met, the old note may be sued upon. This 
is true whether or not the old note is retained by the 
creditor. 

§ 202. Note as a Gift 

If a gift is made of a promissory note payable to the 
order of the donee, and he should indorse it and transfer it 
to an innocent holder for value, it would be good. The donee 
could not collect by suit himself because he would be met 
by the defense of no consideration. 

If the note were made payable to the donor's order and 
he indorsed it in blank, the immediate party who received it 
and gave no value in return could not enforce pa)mient of the 
note. 



246 



NEGOTIABLE INSTRUMENTS 



I. 

2. 
3. 



Review Questions 

If a note is given to A and the donor dies, can A collect? If 
A has discounted the note at the bank can the bank collect? 

What are the essentials of a promissory note? 

The holder of a demand note failed to present it for two years. 
Then the maker had vanished. Could the holder collect from 
the mdorsers? 

What are nine different ways in which a note may be issued 
or handled, and the varying liabilities of the maker in each 
case? 



CHAPTER XXXV 



BILLS OF EXCHANGE AND ACCEPTANCES^ 

§ 203. Definition 

§ 126. — A bill of exchange is an unconditional order in 
writing addressed by one person to another, signed by the 
person giving it, requiring the person to whom it is ad- 
dressed to pay on demand or at a fixed or determinable 
future time a certain sum in money to order or to bearer. 

An inland bill is one drawn and payable within the states 
Any other is a foreign bill. A bill of exchange when accepted 
becomes an acceptance. 

A draft is an order to pay money — it includes bills of 
exchange, checks and all other forms of orders to pay money. 

§ 204. Liability of Maker, Drawer, and Acceptor 

The maker of a draft is called the drawer. He is anal- 
ogous to the maker of a note. The maker of a promissory 
note engages to pay the note he issues according to its tenor 
and admits the existence of the payee and his capacity to 
indorse. The drawer of a draft assumes the same liability. 
if it is not paid by the drawee and the necessary proceedings 
on dishonor are taken. A draft may be presented to the 
drawee before payment to make sure that he will accept its 
obligations. 

§ 205. Acceptance 

§ I32.--The acceptance of a bill is the signification by the 
drawee of his assent to the order of the drawer. The 
acceptance must be in writing and signed by the drawee. It 

^ For forms see Chapter CIII, Forms 42-44. 

247 




^48 NEGOTIABLE INSTRUMENTS 

must not express that the drawee will perform his promise 
by any other means than the payment of money. 

An acceptance is an engagement to pay a bill of exchange 
as requested by the drawer. An acceptance is usually accord- 
ing to the tenor of the bill, in which case it is called a general 
or absolute acceptance. 

Qualified Acceptance. A qualified acceptance is sometimes 
given. 

§ 141.— An acceptance is quahfied which is : 

1. Conditional; that is to say, which makes payment by 
the acceptor dependent on the fulfillment of a condition 
therein stated; 

2. Partial ; that is to say, an acceptance to pay part only 
of the amount for which the bill is drawn ; 

3. Local; that is to say, an acceptance to pay only at a 
particular place; 

4. Qualified as to time; 

5. The acceptance of some on^ or more of the drawees, 
but not of all. 

The holder may require that the acceptance be written on 
the bill. It should not be written on another piece of paper. 
The drawee has twenty-four hours to decide whether he will 
accept or not. If he destroys the bill or fails to return it, he 
will be held to have accepted it 

Mode of Acceptance. Upon presentation of the bill of 
exchange, the drawee, if he wishes to pay the order according 
to its terms, may do so by writing across its face the word 
"Accepted," followed by signature and date. When this is 
done by the drawee he becomes the acceptor, and thereby 
agrees to pay the bill at maturity, according to its tenor, with- 
out qualifying conditions. 

Effect of Acceptance. The effect of the acceptance of 
a bill of exchange is to constitute the acceptor the principal 
debtor. The bill of exchange becomes, by the acceptance, 



BILLS OF EXCHANGE AND ACCEPTANCES 



249 



similar to a promissory note — the acceptor being the promissor, 
and the drawer standing in the relation of an indorser or 
surety. 

§ 206. Dollar Acceptance 

By the term "dollar acceptance," as used in international 
trade, is meant an accepted bill of exchange drawn in Ameri- 
can dollars. The term has become familiar in this country 
since the enactment of and amendments to the federal reserve 
banking law, which created a system of modern bills of 
exchange for American business. Prior to the establishment 
of this system, it was the usual custom to draw bills of 
exchange in pounds sterling. Most of the international trade 
was financed through London; that is to say, financial in- 
stitutions of London granted to traders acceptance credits 
which authorized the drawing of bills of exchange on such 
institutions. By this agreement, the trader was assured that 
the London bank would accept his bill. Thus, such institutions 
lent their credit, for which they charged a commission, and 
a merchant in London or even in South America would deal 
with both his creditors and his debtors in this country in 
terms of pounds sterling. 

Under the amendment of September 7, 19 16, to the Fed- 
eral Reserve Act, in addition to the power to accept bills 
involved in the exportation and the importation of goods, 
federal reserve banks have the power to accept bills drawn 
upon them by foreign banks or bankers in the same way that 
London banks accommodate foreign traders. The reserve 
banks may accept drafts or bills of exchange drawn upon 
them, having not more than three months to run, exclusive 
of days of grace, drawn under regulations to be prescribed 
by the Federal Reserve Board, by banks or bankers in foreign 
countries or dependencies or insular possessions of the United 
States, for the purpose of furnishing dollar exchange as re- 



2SO 



NEGOTIABLE INSTRUMENTS 



quired by the usages of trade in the respective countries, 
dependencies, or insular possessions. 

It is likely that in years to come New York will be as 
important financially and commercially as London; and, as 
the use of a decimal currency has much to recommend it, 
there is good reason to believe that the future will see dollar 
exchange more generally used than sterling exchange has been 
in the past. It is certain that every business man should imder- 
stand clearly what is meant by "dollar acceptances/' and its 
synonyms "dollar exchange," and "dollar credits," as the 
terms are used by bankers. 

§ 307. Bank Acceptances 

Under the federal reserve law, member banks of the fed- 
eral reserve system are empowered to grant bankers' accept- 
ance credits ; that is to say, "Any member bank may accept 
drafts or bills of exchange drawn upon it and growing out 
of transactions involving the importation or exportation of 
goods having not more than six months' sight to run." * A 
bankers' acceptance, as defined by the Federal Reserve Board, 
"is a bill of exchange of which the acceptor is a bank or trust 
company, or a firm, person, company, or corporation engaged 
in the business of granting bankers' acceptance credits." 

When the bank, trust company, firm, person or corpora- 
tion, accepts the bill of exchange, it has loaned its credit, not 
its funds. The direct responsibility for the payment of the 
bin of exchange that has become an acceptance, rests on the 
bank or concern granting the acceptance credit. Such accepted 
bills of exchange are payable in our country and hence are 
known as "dollar acceptances." 

§ 20^. Domestic Bank Acceptances 

The rules of the Federal Reserve Board are somewhat 
more rigid with regard to bank acceptance credits covering 

■ I 13 of the Federal Reserve Act. 



BILLS OF EXCHANGE AND ACCEPTANCES 



251 



domestic shipments. Such acceptances are used mainly to 
finance domestic transactions involving major staples. And 
the federal reserve law provides that "Any member bank 
(of the federal reserve system) may accept drafts or bills 
of exchange drawn upon it, having not more than six months' 
sight to rim, exclusive of days of grace .... which grow out 
of transactions involving the domestic shipment of goods, pro- 
vided shipping documents^ conveying or securing title are 
attached at the time of acceptance; or which are secured at 
the time of acceptance by a warehouse receipt or other such 
document conveying or securing title covering readily market- 
able staples." 

Such acceptances are known as dollar acceptances against 
domestic shipment of goods, or domestic bank acceptances. 

§209. Trade Acceptances 

In this country most of the credit business has been done 
on the open-account system whereby goods are sold at thirty, 
sixty, or ninety days, or in many cases without any definite 
time of payment. This system has many disadvantages. It 
compels the seller to carry the financial burden of the buyer 
and so ties up his capital for an indefinite period. Also, the 
expense involved in collecting slow accounts and granting 
extensions constitutes in the aggregate a heavy tax on business. 
' All these disadvantages are eliminated by the use of the trade 
acceptance. 

A trade acceptance is a bill of exchange drawn by the 
seller directly on the purchaser of goods, and accepted by the 
purchaser. The direct responsibility for the payment of the 
bill rests on the person, firm or corporation accepting the bill 
of exchange. The Federal Reserve Board has defined the 



all the documents required to prove title to the ship- 
irance policy, consular invoice, and so on. Principles 



• "Shipping documents" are all the documents required to prov 
ments — the bill of lading, insurance policy, consular invoice, and 
of Foreign Trade. Savay, page 306. 



dS^ 



NEGOTIABLE INSTRtTMENTS 



trade acceptance as a "bill of exchange, drawn by the seller 
on the purchaser, of goods sold and accepted by such pur- 
chaser." 

Functions of the Trade Acceptance. Trade acceptances 
are instnunents of credit, and when properly created are 
eligible for purchase by federal reserve banks. They thus 
add to the circulating medium, just as do eligible bank ac- 
ceptances. 

The extensive use of the trade acceptance in American 
business is urged as a remedy to cure the defects of the open- 
account system, as it provides the seller with an instrument 
which he may sell to his bank, broker, or other persons en- 
gaged in discounting such commercial paper, thus enabling 
him to keep liquid and mobile the capital that would otherwise 
be tied up in open book accounts. 

■i' 

§210. The Discount of Acceptances 

Under Section 14 of the federal reserve banking law, and 
under rules and regulations prescribed by the Federal Reserve 
Board, federal reserve banks may purchase and sell in the 
open market bankers* acceptances and bills of exchange from 
banks, firms, corporations, or individuals. 

It should be borne in mind that federal reserve banks 
proper do not "accept" bills of exchange, but may purchase 
acceptances in the open market (discount them), or may 
rediscount eligible acceptances for member banks. 

§ 211. Rules for Discount of Bank Acceptances 

§ 182.— A bankers* acceptance may be discounted with any 
^federal reserve bank, under the following rules prescribed 
by the Federal Reserve Board: 

1. The acceptance must have maturity at purchase of 

not more than three months. 

2. The bill must have been drawn under credit opened 



3- 



BILLS OF EXCHANGE AND ACCEPTANCES 253 

for the purpose of taking care of transactions in- 
volving 

(a) Foreign shipment of goods, 

(b) Shipment within United States, provided bill 

is accompanied by shipping documents, or 

(c) Storage within United States of readily mar- 

ketable goods, provided acceptor is secured 
by proper receipt, or 

(d) Storage within United States of goods ac- 

tually sold, provided the bill is secured by 

pledge of such goods. 
Or the bill must be drawn by a foreign bank or 
banker for the purpose of furnishing dollar ex- 
change. 



§ 212. Rules for Discount of Trade Acceptances 

Federal reserve banks may purchase trade acceptances 
under the following rules prescribed by the Federal Reserve 
Board: 

The bill must have arisen out of an actual commercial 
transaction, domestic or foreign; that is, it must be a bill 
which has been issued or drawn for agricultural, industrial, 
or commercial purposes or the proceeds of which have been 
used or are to be used for the purpose of producing, purchas- 
ing, carrying or marketing goods in one or more of the 
steps of the process of production, manufacture or distribu- 
tion. It must have a maturity at time of purchase of not 
more than ninety days, exclusive of days of grace. 

The word "goods" has been construed as meaning goods, 
wares, merchandise and all agricultural products including live 
stock. 



§ 213.' The Drawee 

The drawee is not liable unless and until he accepts the 
bill. A bill may be addressed to two or more drawees, but 
not in the alternative, or in succession. 




254 



NEGOTIABLE INSTRUMENTS 



Where drawer and drawee are the same person, or tne 
drawee is fictitious, or where the instrument is ambiguous, 
the holder may consider the instrument either a promissory 
note or a bill of exchange at his option. 

§ 214. Presentment for Acceptance 

Presentment for acceptance must be made: 

§ 143. — I. Where the bill is payable after sight or in any 
other case where presentment for acceptance is necessary in 
order to fix the maturity of the instrument; or 

2. Where the . bill expressly stipulates that it shall be 
presented for acceptance; or 

3. Where the bill is drawn payable elsewhere than at 
the residence or the place of business of the drawee. 

In no other case is presentment for acceptance necessary 
in order to render any party to the bill liable. 

Presentment for acceptance follows the general rules given 
for presentment for payment (See Chapter XXXI.) 

§ 215. Protest for Non-Acceptance 

A foreign bill appearing on its face to be such must be 
protested on the day of its dishonor by non-acceptance, if the 
owner desires to hold the drawer and indorsers. 

§ '53* — ^The protest must be annexed to the bill, or must 
contain a copy thereof, and must be under the hand and seal 
of the notary making it, and must specify: 

1, The time and place of presentment: 

2. The fact that presentment was made and the maimer 
thereof ; 

3, The cause or reason for protesting the bill ; 

4. The demand made and the answer given, if any, or 
the fact that the drawee or acceptor could not be found. 

§ 154. — Protest may be made by: 

1. A notary public ; or 

2. By any respectable resident of the place where the 



BILLS OF EXCHANGE AND ACCEPTANCES 255 

bill is dishonored, in the presence of two or more creditable 
witnesses. 

§ 157— A bill which has been protested for non-accept- 
ance may be subsequently protested for non-payment. 

Acceptance for Honor. An outside party may accept or 
pay a bill of exchange to save the credit of the drawee. In 
such case the acceptor makes himself liable, and if he must 
pay the bill, he has a right to be reimbursed by the person 
who should have paid it. 

A bill payable in a foreign country would be protested 
according to the law of that country, and not according to the 
law of the place where the bill was made. 

§216. Bills in a Set 

§ 177— Where a bill is drawn in a set, each part of the 
set being numbered and containing a reference to the other 
parts, the whole of the parts constitute one bill. 

In such a case, the acceptance should be written on one 
of the sets and on one part only. If the drawee accepts 
more than one part, he may be held liable on each part as 
if it were a separate bill. 

Usually, "where any one part of a bill drawn in a set is 
discharged by payment or otherwise, the whole bill is dis- 
charged." 

When the acceptor of a bill drawn in a set pays it with- 
out requiring the part bearing his acceptance to be delivered 
up to him, and the part at maturity is outstanding in the 
hands of a holder in due course, he is liable to the holder 
thereon. 



9S6 



'fi' 



NEGOTIABLE INSTRUMENTS 



Review Questions 



JL« 



A foreign bill? 



What is a bill of exchange? An inland bill? 
An acceptance? A draft? 

2. What is a general acceptance? A qualified acceptance? What 

is the form of acceptance? Its effect? 

3. What is meant by "dollar acceptances"? Why is the term 

significant? 

4. What is a "bankers' acceptance" as defined by the Federal 

Reserve Board? What is necessary to make a bankers' ac- 
ceptance eligible for discount at a federal reserve bank? 

5. What are domestic bank acceptances? 

6. What are trade acceptances? What are their functions? What 

is necessary to make a trade acceptance eligible for discount 
at a federal reserve bank? 

7. When is presentment for acceptance of a bill of exchange 

necessary? What is the effect if such a bill is not presented? 

8. What must protest of a foreign bill of exchange specify in 

order to hold drawer and indorsers? Who can protest a 
bill? Must a bill payable in a foreign city be protested by 
the law of the place where it is payable or by our Negotiable 
Instruments Law? 

9. When bills are drawn in a set, what is the duty of the acceptor? 

10. When must bills of exchange be presented for acceptance? 

11. What is the rule as to protest of foreign bills of exchange? 






CHAPTER XXXVI 

BANK CHECKS 

§ 217. Definition 

A check may be defined as an unconditional order on a 
bank or a banker to pay on demand a specified sum to a person 
named or to his order, or to the bearer. 

§ 185. — ^A check is a bill of exchange drawn on a bank, 
payable on demand. Except as herein otherwise provided, 
the provisions of this act applicable to a bill of exchange 
payable on demand apply to a check. 

§ 2x8. Checks as Evidence of Payment 

At the present time bank checks are used extensively as 
a substitute for cash payments. Few business men pay bills 
except by check. If actual money had to be constantly in 
transfer from one person to another, it would limit the amount 
of business that could be done at one time as the volume 
of cash in circulation is not adequate. The use of checks 
is an elastic medium of exchange that meets any possible 
demand of modem business. 

The use of checks for the payment of debts affords the 
very best possible evidence of the fact of payment. A check 
given to pay a debt can only be cashed by the indorsement 
of the recipient, and his indorsement is the best evidence that 
he received the check and collected the money. This important 
function has been amplified in modern accounting by the use 
of voucher checks. A voucher check contains a clear state- 
ment of the exact obligation that the check is intended to 

257 



asS 



NEGOTIABLE INSTRUMENTS 



BANK CHECKS 



I 



I 



pay. Anyone who accepts a check with the statement on the 
check of the puqx>se to which the payment is to be appHed 
is estopped thereafter from applying the payment to any other 
obligation or indebtedness. These checks are found in many 
forms. 

The chief difference between an ordinary bill of exchange 
and a check is that the latter is always drawn on a bank and 
is always payable on demand. In addition, these points of 
difference are to be noted: 

1. Grace is not allowed on a check. 

2. The check must be drawn on funds actually in the 

bank. 

3. The death of the drawer of a check revokes it. 

§ aig. Signature of Drawer 

The signature of the drawer is necessary, but it need not 
be placed at the bottom of the instrument. The order may 
be written under the signature, or some form such as "I, 
Henry Adams, direct you to pay to, etc.," may be used. The 
bank will have the signature on file and will be able to verify 
it in whatever form it occurs. 

§ 220. Presentment for Pajonent 

§ 186. — ^A check must be presented for payment within a 
reasonable time after its issue or the drawer will be dis- 
charged from liability thereon to the extent of the loss 
caused by the delay. 

Thus if the holder keeps the check two weeks, and the 
bank fails before the check is presented, the liability of the 
drawer will be reduced in proportion to his total loss. That 
is, if the bank paid depositors only forty cents on the dollar, 
the holder of the check would be able to get only 40 per cent 
of its amount from the drawer. The courts will hold that 



259 



the other 60 per cent was lost to the holder by his own un- 
reasonable delay. That is, the drawer is discharged from his 
liability to the holder only to the extent of the actual loss 
caused by the delay. 

If the check must be sent to another place for collection, 
it should be started on the day following its receipt, and 
should go by a reasonably direct route. In some states it has 
been held that unreasonable delay is caused by sending a check 
over an indirect route through various correspondent banks. 

§221. Bank's Relations with Depositor 

The depositor in effect lends money to the bank, and the 
bank promises to repay it on demand. The bank is in no sense 
a trustee, unless there has been an express agreement to that 
effect. 

The bank may charge against a depositor's account any 
notes of his which it holds and which are due. If the depositor 
has made an overdraft, the bank may apply subsequent deposits 
against it. A bill or note made payable at a bank authorizes 
the bank to pay it when due out of the depositor's account. 

If the funds of a depositor on hand are not enough to 
pay a check in full, the bank need not pay it in part, but it 
may legally do so. 

If the bank wrongfully refuses payment of a check, the 
drawer may sue for damages. If he is a business man and 
can prove that his credit has actually been injured, he may 
recover a substantial sum. 

In general practice, a bank does not, except by special 
arrangement, take checks of depositors for collection, but 
accepts them outright for deposit. By this method the de- 
positor is able to draw checks against his deposits without 
waiting until the bank has made sure that they can be collected. 
On the other hand, if the depositor does not wait a reasonable 
time for the collection of the checks he has deposited before 



36o 



KEGOTIABLE INSTRUMENTS 



drawing against them, the bank may legaUy refuse to honor 
his checks. 

If a depositor gives a check dated some days ahead and 
It IS presented to the bank before its date, the bank wiU pay 
It or certi fy it at its own peril. 

§ aaa. Bank's Relations with Holder 

§ i^.— A check of itself does not operate as an assign- 

"^TuX ^\ •*"" "^ ""* ^""'•^ *° ^"^ "«"t of the drawer 
w,th the bank, and the bank is not liable to the holder unless 
and until it accepts or certifies the check. 

The holder of an uncertified check has ordinarily no riehts 
against the bank. If the bonk refuses to pay when it has 
funds of the drawer on hand, the depositor may sue the bank 
for damages to his credit, but the holder's recourse is only 
against the drawer of the check. 

•II ^r"" '^-^^ ^"^ ^"^^ *** *^^ *«* *as given for an 
dlegal considerauon. as in payment of a wager, the bank must 
^di It. and the drawer win have no claim against the bank 
for so doing. The bank will pay checks in the order of 
Aeir presentment If two or more checks are presented at 

X^^ ^^ "^^ ^^ ^ ^^^'''' °"^^' '* 

§22$, Revocation 

..a'^\uT^I ''^ *.' "^^' *° ^**'P P^y""'* °" » check, 
and If Ae bank pays die check after it has been notified no 

to do so. It win be liable. The drawer alone has a legal righ 

b^ws of fraud ought to mform the bank at once if he camiot 
reach the drawer In such a case the bank will probably 
delay payment of the check until the matter has bee^ 
cleared up. ^ 

Even though the drawer is successful in stopping payment 



BANK CHECKS 



261 



of a check, he will be liable to an innocent holder for value 
if the indorsements are proper. 

After a check has been certified, payment may not or- 
dinarily be stopped. 

The death of the drawer will revoke a check, but the bank 
must have notice, on the general principle that agency ceases 
only after the agent has received notice. Insolvency, when 
the bank is notified of it, also acts as a revocation. 

§ 224. Certification 

When a bank certifies a check, it assumes the obligation 
formerly held by the drawer. The bank will not certify unless 
it accepts the signature of the drawer as correct, and unless 
it has funds of the drawer on hand with which to pay; and 
as soon as it certifies it sets aside the proper amount from the 
drawer's account and holds it for the holder of the check. 
Under the Negotiable Instruments Law certification must be 
in writing. There is no legal obligation on a bank to certify 
any check for anybody. It is a matter of courtesy and con- 
venience. 

§ 187. — Where a check is certified by the bank on which 
it is drawn, the certification is equivalent to an acceptance. 

§ 188. — Where the holder of a check procures it to be 
accepted or certified, the drawer and all indorsers are dis- 
charged from liability thereon. 

Acceptance or certification of a check discharges the 
drawer, but if the drawer takes his own check to the bank 
for certification, he still remains secondarily liable, in case the 
certification be refused for any reason, or the bank becomes 
insolvent. 

If a bank becomes insolvent, the holder of a certified check 
simply ranks among the other creditors. 



362 



NEGOTIABLE INSTRUMENTS 



BANK CHECKS 



263 



§ 335- Fraud 

The bank's agreement with the depositor is that it will 
pay out money on his account only on his order. If it honors 
a forged signature, therefore, it must bear the loss. But in 
New York, if a bank is not notified within one year after 
the return of a forged or raised check it cannot be held liable. 
The bank's liability is to the drawer, not to the payee or 
subsequent indorsers. 

The drawer cannot hold the bank for a loss if he has been 
negligent in drawing the check or has delivered the check to 
the wrong person, or if he has signed and allowed to go into 
circulation a check with unfilled blanks, or if he has so 
negligently filled in a check that insertions might readily be 
made. The depositor should always examine his pass-book 
and vouchers carefully, and report promptly any errors he may 
discover. The bank will not be liable to a drawer whose acts 
amount to acquiescence in what the bank has done. 

If a raised check is paid by a bank, it must bear the loss 
as against the drawer, unless his negligence in filling in the 
amounts made possible the forgery. As against the person to 
whom the money has been paid, the bank must bear the loss 
unless he was a party to the forgery or unless he can return 
the money to the bank without making his situation worse 
than it would have been had the bank refused payment. That 
is, if the payee has not yet done anything that he would not 
have done if payment had been refused, the bank may recover. 
In most cases, however, he will have "delivered goods, given 
up security or otherwise have done something that he would 
not have done if the bank had refused payment. 

If the amount is altered and the bank pays out money in 
gfood faith, it will be able to recover from the one who got 
the money. Even in case of alteration before certification, 
the bank will be able to recover from the one to whom payment 
was made. In case a check is raised after certification, if the 



bank's carelessness was not responsible for the alteration or 
the payment, it will be able to recover the excess paid from 
an innocent holder to whom it paid the raised amount. Re- 
covery is allowed in these cases because the bank is not sup- 
posed to warrant the body of the instrument by certifying it, 
but only the drawer's signature, the sufficiency of the funds, 
the existence of the payee and his capacity to indorse. In 
New York and Pennsylvania the bank's certification is a 
warrant only of the signature and the funds. 

The bank after certifying a check will be liable to a holder 
in good faith, even though the funds are insufficient or the 
signature is forged. It will be liable also to such a holder 
even though the payee is fictitious or the blanks fraudulently 
filled. If a certified check has been stolen or lost, even though 
advertised, a holder in good faith will be able to recover. 

An overdraft is not usually a criminal offense. If a man 
draws a check out with intent to defraud and with knowledge 
that he has no right to draw on the bank for the amount he 
does, he is guilty of stealing and is punishable accordingly. 

§ 226. Checks as Gifts 

If a check is given as a present, it will be valid, and sub- 
ject to the defense of no consideration only as between the 
donor and donee. A check given as a gift causa mortis 
if not cashed or certified before the death of the donor, is 
revoked. 



I. 



2. 



3- 



Review Questions 

Prepare a voucher check which is a negotiable instrument and 
evidence of the payment of a particular account or obligation. 

What liability, if any, does a bank assume in paying a check to 
a holder who claims under a forged indorsement? 

The maker of a promissory note sends the payee his check for 
the amount on the day of maturity. The payee has the check 



264 



NEGOTIABLE INSTRUMENTS 



I 



certified at the bank, but before it is paid the bank fails. Is 
the maker relieved of liabUity on the note by such certification? 
Give reasons for your answer. 

4. A bank certified a check that had been altered by changing the 

date, name of payee, and raising the amount, and the bank 
subsequently paid the same to the defendant. Thereafter 
the bank sued the defendant for the amount thus paid. Can' 
tt recover? Or does its certification of the check amount 
to a warranty of the genuineness of the body of the check 
as to payee or amount? Explain. 

5. Is a depositing and checking customer of a bank obliged to 

verify the balance shown by pass-book and vouchers? 
4 A retailer received a check for some goods. Before delivering 
them he telephoned the bank, and was told that the check 
was good. When he presented it for payment several hours 
later he found that other checks had been presented in the 
interval, and that the bank refused to honor his on the 
ground of insufficient funds in the depositor's account. Could 
the retailer rely on the telephoned approval of the bank as 
a certification? 

7. How should a check be sent by mail for collection? May the 
holder of an uncertified check sue the bank? If a bank 
wrongfully dishonors a check, has the drawer any remedy? 

& What IS the liability of the parties to a certified check? If a 
bank pays a check drawn on it by a depositor, after payment 
has been stopped, can the depositor recover the amount so 
paid? 

9. In your state what is the statutory limitation to a bank's liability 
for payment of a forged or raised check after its return to 
a depositor? Liability of a bank for payment of a check 
after drawer's death? 

Drawer of check has it certified, gives it to payeg. Next day 

bank fails. Can payee collect from drawer? 
On the morning of January 5, A gave B a check for $100 on 

account On the evening of January 7 the bank suspends 

payment. B has not yet presented the check. Is A's debt 

cancelled? 



10. 



II. 



PART VI 
INSURANCE 



L 



\ I 



CHAPTER XXXVII 

FIRE INSURANCE 



§227. The Parties 

Insurance is a contract by one or more parties to indemnify 
another for some loss which he may suffer in the future. If 
there is no loss, the agreement does not have to be carried out. 
The consideration is the premium paid. The written contract 
is called the policy. 

Insurance is of various kinds. Fire, life, and marine in- 
surance are the oldest forms of insurance. In addition, there 
have grown up accident insurance, burglary insurance, boiler, 
plate glass, and tornado insurance, credit, fidelity, title, and 
liability insurance, and other special forms of insurance too 
numerous to mention. 

There are two parties to a contract of fire insurance, the 
insured and the insurer. The person whose property is insured 
is called the insured. The person or company who insures it 
is called the insurer. 

The insurer may be a single individual, or a corporation, 
or an unincorporated company ; or a group of individuals may 
get together and insure themselves. This last system of in- 
surance is called mutual insurance. It is quite common in 
the country districts, where there may be a township mutual 
insurance. Whenever a fire occurs all the members of the fund 
are assessed proportionately to pay the loss. 

In the non-mutual companies a fund is created by the pay- 
ment of premiums, out of which the insurer pays for the 
losses which may occur. 

267 



268 



INSURANCE 



FIRE INSURANCE 



269 



f 



§ aa8. Nature of the Contract 

The contract of fire insurance is a speculative one; that 
IS to say the event on the happening of which the payment is 
to be made, namely, the fire, may never happen. The person 
msunng the buildmg must himself have some actual financial 
interest m the property insured, otherwise it would amount 
merely to a bet on his part as to whether the building would 
be destroyed by fire or not, and would be a gambling contract 

Ta "K" -.^ ° '^ *' '"'"'"'^ •'^^ °° '"'"«t i" the building, 
and the bu.M.ng were destroyed by fire, it would be to his 

prow, and such an inducement might lead to crime. 
Note: 

I. The exact interest of the person insured in the prop- 
erty should always be made a part of the policy, 
to show that the contract is legal. 

§ aag. Agents 

Most insurance is taken out through agents. These may 
be of two kmds: those who are paid by the company and are 
tile agents of the company, and those who act merely as 
brokers and solicit insurance for various companies. Agents 
acting for the company bind the company by their agreements 
If they have the power to close contracts of insurance. If the 
contract is required to be sent first to the company for its 
approval, any agreement of the agent wffl not bind the com- 
pany Sometimes, by means of a short written agreement 
rafled a binder, or even by an oral contract, an agent may 
bind his company for a certain Umited or contingent period 
as for mstance, until the poUcy is made out or while the 
company is investigating the risk. 

The laws of the various states are very strict with reeard 
to insurance agents. In most of them an agent must receive 
a hcense from the state superintendent of insurance, or what- 



ever officer exercises corresponding duties, in order to be 
permitted to act. 

Notes: 

1. In dealing with an insurance agent, always find out 

whether the company has to approve his agree- 
ments before relying on any changes he offers to 
make in the policy, etc. It is always safer to get 
the authorization of the company itself. 

2. If you wish to act as an insurance agent, look up 

the law to see if you must take out a license. 

3. If you deal through a broker instead of an agent of 

the insurance company, the broker is your agent. 

§ 230. The Policy 

Policies may be either open or valued. Most fire insurance 
policies are open. In an open policy the amount payable in 
case of loss is not fixed by the policy but merely the limit 
up to which the company will be liable. Then when a fire 
occurs the company pays the actual value of the loss up to 
^he amount named in the policy. A valued policy, on the 
other hand, specifies the amount payable in the event of a total 
loss. Life insurance policies are valued. 

It is a legal maxim that "to include is to exclude" and the 
insurance policy covers only what is stated therein. Some 
states allow oral agreements with, or representations made 
by, agents to be proved in order to alter the policy, but others 
do not. If it is desired to make other agreements not included 
in the policy form, they may be made in written form and 
made a part of the policy by referring to them in the policy. 

Standard Forms of Policies. New York, Massachusetts, 
and some other states have a standard form of policy, which 
by law must be used by all insurance companies. Massachu- 
setts adopted this form in 1881 ; New York in 1887. The 
Massachusetts form provides that a building must not be left 




270 



INSURANCE 



FIRE INSURANCE 



271 



unoccupied for thirty days or the insurance will lapse. In New 
York it must not be left for over ten days. In addition, the 
New York form contains certain stipulations, including the 
following: 

The company may replace or repair the property instead 
of paying the loss and may take damaged property by paying 
the full appraised value for it It does not hold itself liable 
under certain circumstances, such as war or riot, usurped 
power, or destruction by order of civil or military authority; 
likewise it is released by the neglect of the insured to use all 
reasonable means to save his property when it is menaced by 
neighboring flames. It is not liable if the insured made any 
false representations or practiced any kind of fraud in pro- 
curing the contract. The policy does not cover such things 
as deeds, book accounts, and shares of stock, etc., which merely 
represent obligations to the insured, nor does it cover money. 
It does not cover a building after it or part of it has fallen 
from any cause other than fire. These provisions may not 
be altered. 

If a building is left vacant for ten days, or a factory runs 
after ten o'clock at night or is shut down for more than ten 
consecutive days, the policy becomes of no effect, unless the 
policyholder shall have obtained a permit from the insurance 
company. This permit must be in proper form and must 
be attached to the policy. Any changes in the use or 
occupation of a building, or the installation of such things 
as electrical wires, gasoline stoves, etc., must be consented to 
by the company or the policy is void. In the absence of a 
provision to that effect, a policy is not nullified by the erection 
of neighboring buildings that increase the risk. 
• A common clause, known as "builder's risk" provides that 
mechanics such as gasfitters, plumbers, etc., may not be en- 
gaged to work upon a building without the consent of the 
company. 



For the use or storage of inflammable or explosive sub- 
stances, such as paint and gunpowder, in an insured building, 
a special permit is necessary. 

The policy does not cover certain enumerated articles, 
such as jewelry, curios, office furniture, architects' plans, etc., 
unless they are expressly mentioned in the policy. 

What the Policy Should Include. Every policy of fire in- 
surance should include as full and accurate a description of 
the property covered as possible. It should also include the 
amount for which the insurance is taken out, the term for 
which the policy is to last, the rate of premiums and at what 
time payable, and any other conditions which the parties wish 
to make a part of the agreement. Personal property must be 
described as located at such and such a place; and if it is 
moved, a new policy must be taken out or the original policy 
extended to cover it, as the character of the building in which 
it is kept affects the risk very materially. 

Cancellation. A fire insurance policy may be cancelled by 
either party upon five days' notice ; a proportionate amount of 
the premium paid being returned to the insured when the com- 
pany makes such cancellation. 

Notes: . 

1. Everything you want included in the agreement 

should be put in writing and incorporated in the 
policy. 

2. If the policy is a standard policy and the company's 

permission is obtained to make any changes in it, 
these should be in writing and made a part of the 
policy by a reference in it to the changes. 

§231. Prwniums 

The premiums are the consideration the insured pays for 
the agreement to insure his property. They are based 




272 



INSURANCE 



FIRE INSURANCE 



273 



! 



on a certain percentage of the amount for which the property 
is insured and are payable periodically, generally either annu- 
ally or semiannually. A failure to pay a premium when it is 
due causes the policy to lapse and be forfeited, but the com- 
pany may consent to an extension of the time for its payment 
or may agree to take notes for the payment of premiums. 

Note: 

I. If an extension of time is procured for the payment 
of a premium, it is safest to have it in writing. 
Make your application for the extension by letter, 
retain copy, and enclose postage for a reply. The 
company's letter will be your protection. 

§ 232. The Property Insured 

The property insured may be either real or personal. A 
policy may cover both, as for instance a dwelling-house and 
furniture. A policy made out to cover "merchandise" or 
"household goods" will cover such as may be acquired later 
as well as those which the insured owns at the time of taking 
out the policy. 

Insurable Interest The party who insures a property must 
have what is known as an insurable interest in it. He may 
either own the property outright, or have some claim upon it, 
such as a lien or mortgage. The standard form of policy in 
New York provides that the insured must be the sole and 
absolute owner of the property, free from any claims of anyone 
else, but anyone who is not the sole and absolute owner may 
insure his interest with the company's consent. 

If a mortgagee or trustee wishes to take out a policy, a 
clause must be inserted that the loss shall be payable "as his 
-interest may appear." The company's consent must also be 
obtained to a chattel mortgage, or the policy will be void. 

A man who insures another's property has an insurable in- 
terest therein and may protect himself by reinsuring it. 



A man may have an insurable interest in property which 
he does not own at all. Thus a salaried agent whose employ- 
ment is contingent upon the continued existence of a given 
property, may insure it. But the value of his indirect interest 
must somehow be determined and agreed to by the insurer and 
the insured. In like manner, a stockholder of a corporation 
has an interest, real though difficult to determine, in the prop- 
erty of the corporation. 

Alienation. Any change in ownership or possession of 
property, including sale for taxes or under a lien, will make 
it necessary to assign immediately the policy to the new owner, 
unless he chooses to take out a new policy. Assignment must 
be with the consent of the insurance company and recorded on 
the company's books. 

What May Be Insured. Any kind of tangible property 
may be insured. Deeds, bonds, shares of stock, book accounts, 
bank notes, promissory notes, and bills of exchange, etc., are 
not insurable. These merely represent an interest which the 
party has in some property and, if they are destroyed, the 
claim may be proved by witnesses without them. Money may 
not be insured ; the United States Treasury will redeem what 
remains of it. 

What May Be Insured Against. A fire insurance policy 
insures for damages other than those caused by actual flames. 
Injury due to the heat of a fire in an adjoining building would 
be recompensed, as would also damage caused by the means 
used to extinguish a fire, or damage caused by removing the 
goods to a place of safety even though it later developed 
that such moving need not have been done. To insure 
against damage by lightning where there was no actual 
ignition, a special lightning clause must be attached to the 
policy. 

Floating Stock. A merchant may insure his stock with the 
understanding that it is to be replaced by other material of the 




274 



INSURANCE 



FIRE INSURANCE 



275 



i|! 



t I 



I 



same kind. His policy would be known as a floating one, and 
in case of damage, he may recover on the stock on hand when 
the fire occurred, regardless of what stock was on hand when 
the policy was issued. 

Coinsurance. A coinsurance clause stipulates that, in re- 
turn for a reduced rate, the insured must insure his property 
lip to a certain percentage of its value, usually 80 per cent, 
and if he fails in so doing he must himself bear a proportion 
of any loss, thus making him ? coinsurer with the company 
of his own property. 

For instance, if his property were worth $10,000, an 80 per 
cent coinsurance clause would obligate him to carry insurance 
to the amount of $8,000. If he carried only $6,000 and a loss 
occurred, he would be paid only such a proportion of his loss as 
the insurance he carried bore to the amount he agreed to carry, 
in this case three-fourths. Therefore, if fire damaged his 
property to the extent of $4,000, he would receive only three- 
fourths of this amount, or $3,000. 

Reinsurance. For the better distribution of risks, a com- 
pany after writing a policy often insures itself for the whole 
or a part of the risk it has just insured. If then, the original 
insurer has to pay, the reinsurer is liable to the insurer for 
the amount paid, or for the proportionate part of it, as may 
have been agreed. The insurer may not reinsure for more 
than the original policy. The amount to be paid by the rein- 
surer is the amount the insurer has to pay, or a part of it, 
with one exception. If the reinsurer pays the claim of the 
insurer before the claim of the insured is settled, then it does 
not matter to the reinsurer what terms the insurer makes with 
the insured. If the insurer becomes insolvent, makes a final 
settlement and is discharged, he will receive from his reinsurer 
only what he paid. But when the insured has been paid off, 
then the other creditors can have no claim on what is due 
the insurer from the reinsurer unless the reinsurance has been 



taken into account in making the calculations of dividends 
under which the insured was paid. 

Notes: 

1. In changing the location of personal property always 

be sure to take out a new policy. 

2. In buying buildings of any kind, the first thing to do 

is to arrange for their insurance. 

3. A person living in a house for which he is paying 

by instalments has an insurable interest in it. 

§ 235. Warranties and False Representations 

False representations are misstatements made to the com- 
pany and its agents when applying for the policy, or after- 
wards as to any change in the condition of the property of 
which the company has a right to know. If such misstate- 
ments materially affect the policy they will render it void. 

Concealment is the suppression of any material facts which 
the insurer does not know or is not presumed to know. Such 
suppression may be of the fact at the time application is made 
or of some later change in the condition which the insurer 
ought to know. 

Any fact is material that might properly influence the 
insurer in taking or refusing the risk or that would affect 
the amount of the premium charged. 

Warranties are representations which are included in the 
policy. They may consist in answers to a schedule of questions 
which are attached to the policy and made a part of it. If any 
of the warranties are false the policy is of no value. Even an 
inaccurate statement made through an honest mistake, if it is 
made a part of the policy, renders it useless. 

Other Insurance. Misstatements as to other insurance 
where the policy is of the standard form will render it of no 
effect whether they are warranties or mere representations. 



I 



376 



INSURANCE 



Increasing the insurance on the property increases the tempta- 
tion to be careless or to have "accidental" fires, and the law is 
strict that the company must know of and consent to insurance 
on the property in any other company. Where a property is 
covered by policies in different companies, any one insurer is 
liable only for the proportion of the loss that his policy bears 
to the total amount of insurance. 

Notes: 

1. Be very careful to make only the most accurate 

statements in answer to any schedule of questions 
to be filled out in making application for the 
policy. If these statements are wrong, and the 
schedule is attached to and made a part of the 
policy, your policy may be of no value. 

2. To conceal matters material to the risk may avoid 

the policy. 

§ 234. Settlement of Losses 

When a loss occurs the insured must at once notify the 
company and then make out an inventory of the damaged 
property, stating the value of each article separately. This in- 
ventory must be sworn to. The New York standard policy 
gives the company the option to require that it be confirmed by 
the certificate of a magistrate or of a notary public. In this 
inventory the insured must state if there are any other claims 
against the property; or, if it is partly owned by others, who 
they are and what is their interest in it, and what, to the best 
of his knowledge, was the cause of the fire. 

The company usually sends out an adjuster to investigate 

' the loss. He must be shown all the damaged property and 

any papers relating to its value, or plans, specifications, etc., 

which would aid in determining the value of the property 

destroyed. The insured must be ready to submit to any ex- 



FIRE INSURANCE 



277 



aminations which the company may wish to make and to make 
any relevant affidavits it may require. 

If the insured and the company cannot agree on the amount 
necessary to cover the loss, the company and the insured each 
appoint one appraiser and the two go over the property and 
value it. They select an umpire who decides between them in 
case there is any dispute as to the proper valuation. Their 
decision settles the amount which the company is liable to pay. 

A mortgagee has the right to recover from the insurance 
company whatever is due him under the mortgage at the time 
of the damage, provided of course the face of the policy covers 
the amount due and that the policy bears the customary mort- 
gagee clause. This right, however, does not run with the 
land. That is, if the mortgagor sells the property subject to 
the mortgage, the buyer, who assumes the mortgage, may 
insure it without the mortgagee's having any interest in the 
policy. But if the buyer insures it, making the loss payable 
to the mortgagee, he may not revoke or cancel the insurance 
without the mortgagee's consent. In the same way, if a policy 
taken out by the owner, is made payable to the mortgagee 
as his interest may appear, his rights cannot be destroyed 
by any act of the owner. If the owner assumes to accept a 
settlement of a claim without the mortgagee's consent, he will 
not be bound by it. 

Options Which the Company May Exercise, Under the 
standard policy in New York, the company has the right to 
replace or repair the property instead of paying for the loss. 
Or it may take the property on paying the appraised value for 
it. If the property is capable of being repaired, the company 
pays only the amount which is adjudged necessary to restore 
it to its former condition. 

If the insured has any claims against persons other than 
the company for the value of the property, he must transfer 
them to the company when he is paid the amount adjudged 



i i! 




278 



INSURANCE 



FIRE INSURANCE 



proper to cover the loss, and the company may sue and collect 
on the other claims. 

Notes: 

1. It is wiser to leave property in its damaged condition 

after a fire until the adjuster arrives. But if there 
is danger of its becoming more damaged by being 
left, it should be removed to a place of safety. 
The insured should take every precaution to keep 
the loss as low as possible. 

2, Be sure to include everything in the inventory and 

to state its full value. It will be very difficult to 
prove any greater value afterwards. 



279 



9. What representations are material ? What is a concealment and 

when must it take place in order to avoid the policy? 
10. An insurance company fails, and can pay but 6 per cent of its 
liabilities. Some of its risks are reinsured. Is the solvent 
reinsurer liable for the whole amount insured by it, or only 
for the amount which the bankrupt insurer pays? Answer 
fully and give reasons. 



Review Questions 



ii 



I. 

.2. 



What is a contract of insurance? 

Why must the person insuring have an interest in the property 
insured? Has a mortgagee an insurable interest? 

3. What is the difference between an insurance broker and an 

insurance agent? 

4. What is the distinction between an open and a valued policy ? 

5. What occurrences may invalidate a policy? 

6. What phrase is used if a mortgagee insures property? What 

will be the extent of the mortgagee's recovery if the mortgage 
had been reduced before the fire occurred? 

7. A notice of the premium due is sent to the insured with no 

mention of a penalty for failure to pay. Does policy lapse 
if payment is tendered one month late and refused by the 
company ? 
& What is the meaning of an 80 per cent clause in a fire insurance 
contract or policy, and what would be the cash settlement 
by the insurance company in case the property insured inven- 
toried at the time of the fire $150,000 but was insured for 
only $100,000? What would be the settlement if the property 
insured inventoried only $75,000 but was insured for $100,000? 



I 



it 



LIFE INSURANCE 



281 



t 



CHAPTER XXXVIII 

LIFE INSURANCE 

§935. Nature of Contract 

Life insurance today is one of the most important busi- 
nesses in tlie country. Before the invention of the mortality 
tables the rates were high and the business was on too uncer- 
tain a basis to be widely utilized. With its present develop- 
ment it has become of the greatest value as a means of saving, 
investing, and protecting business. Its value as a protection 
against a dependent old age has caused governments through- 
out the world to become interested in it, different forms of old- 
age insurance being in use in various countries and among the 
state employees of Massachusetts. 

This form of insurance has been imder discussion for the 
past few years by the various state legislatures and commis- 
sions appointed for that purpose, but aside from Massachusetts 
has not actually come into being. The main objection, of 
course, to such insurance is that it will raise the taxes, and 
legislatures do not feel that the need is great enough to justify 
the increase of taxes at the present time. 

§ a3<L Insurable Interest 

Like the contract of fire insurance, the contract of Kfe in- 
surance is a speculative one. If a person attempts to insure the 
life of someone other than himself, he must have an insurable 
interest in it, though this interest need not continue during the 
life of the insured nor e^tist at his death. One may, however, 
insure one's own life and make such insurance payable to a 
beneficiary who has no insurable interest in one's life. 

280 



An insurable interest in a human life is not easy to define. 
Generally the party who does the insuring must be related to 
the insured by such ties of blood, marriage, or contract that the 
death of the insured would materially injure him. A married 
couple have an insurable interest in each other's lives ; a father 
has an insurable interest in the lives of his children because 
they might some day support him; a sister may insure her 
brother for similar reasons; a partner may insure the life of 
his copartner; or a creditor may likewise insure the life of a 
debtor. 

§ 237. The Parties 

The parties to a life insurance policy are: the person whose 
life is insured, or the applicant; the person for whose benefit 
it is insured, or the beneficiary; and the person or company 
insuring it. 

Life insurance may be conducted either through a corpora- 
tion, or through a fraternal organization, or it may be mutual. 
Many of the large life insurance companies are either mutual- 
ized, or are mutualizing. In a mutualized life insurance com- 
pany, all excess over actual cost of insuring is later returned 
to the policyholders as dividends. In a stock corporation, this 
excess goes to the stockholders. Where a former stock com- 
pany becomes mutualized, provisions are usually made by 
which the stockholders and policyholders are each to have a 
share in the dividends in proportion to what is determined to 
be their actual interest in the company. 

Fraternal benefit insurance exists among the various 
masonic and other orders and in many business organizations. 
It is a form of mutual life insurance. When a benefit falls 
due, it is raised by assessment on the members in proportion 
to their rights to benefit by the fund, or else a fund is raised 
by assessment and kept on hand to meet the benefits as they 
become due. 



aSa 



INSURANCE 



LIFE INSURANCE 



283 



if 



§ 338. The Policy 

Policies are of various forms. In participation policies, 
the accumulated surplus in any year is divided among the 
policies and the share of each is credited to it, to be paid over 
when the policy becomes due. 

In non-forfeitable or incontestable policies, the company 
agrees that after a certain period of time the policy shall not 
be forfeited for any cause except non-payment of premiums. 
Courts will usually enforce this agreement. Of course, if the 
beneficiary has no insurable interest, the contract would have 
been illegal from the first and could not be enforced. 

Policies may be whole life, that is, the premiums continue 
to be payable until the death of the person whose life is in- 
sured. If the policy is a participating one, the dividends may 
either be applied to reduction of the premiums, or may be 
accumulated, as the holder prefers. 

Another form of policy is Umited payment life. The 
premiums on this class of policy are so divided as to be payable 
within a limited number of years. After this the policy 
becomes a paid-up policy and is payable on the death of the 
person whose life was insured. 

There are also endowment policies and term policies. The 
endowment policy is perhaps the most common form of policy. 
Under it, the amount is payable either at the end of a fixed 
term of years, or upon death in case of death before the 
expiration of that period. This policy operates both as an 
investment and a protection. At the end of the term the 
insured may, as a general rule, exercise his option to take out 
a paid-up policy and leave the money invested. 

' Term insurance is unlike endowment insurance in that it 
does not allow any accumulations, nor permit the holder to 
take out a paid-up policy at the end of the term. When the 
term has expired it simply lapses. 



Term insurance is simply protection for a definite term 
at the lowest possible cost. Like fire insurance it covers 
the risk for the time specified and then ceases. It provides 
no accumulations to offset advancing age, the insured must 
assume this burden, nor does it provide cash, loan, extended 
insurance or paid-up values.* 

Double indemnity policies were first offered about 191 2. 
These policies provide that in case of death by accident, the 
beneficiary shall receive twice the face of the policy. At first 
this double payment was made only in case of death by 
accident on a common carrier, but the policies now being 
written provide for double indemnity in case of death by 
any accident. In addition, these policies now provide that in 
case of permanent disability, payment of premiums shall be 
waived and one-tenth the face of the policy will be paid each 
year, and at death the full face of the policy will be paid. 

Application and Examination, If the company does not 
consider the life a good risk, it has a right to reject the appli- 
cation. The applicant is required to answer questions on an 
application blank and to submit to a medical examination. As 
the application blank is made a part of the policy, any state- 
ments on it amount to warranties, and the policy will be of no 
value if any of them are false. If, otherwise than on the blank, 
the insured makes any false representations which have any 
effect on the risk or the insurance, the policy is void. 

Notes: 

1. A policy of life insurance should always be carefully 

read to make sure that the kind asked for has been 
issued. It is well to examine closely various 
forms and find out the advantages they offer be- 
fore insuring. The laws of some states give more 
security to the insured than the laws of others. 

2. Fraternal insurance has failed in many cases, be- 



> Dunham on Insurance, I, 298. 



284 INSURANCE 

cause new members ceased joining and those re- 
maining could not pay the increased assessment. 
3, To cheat the company by answering questions on an 
application blank falsely is useless. The policy 
will be worthless when the insurance is needed. 

a, 

§ 339. Premium Rates 

The premium rates in life insurance are worked out by 
means of the mortality tables. These are tables based on an 
examination of statistics, giving the probable length of life at 
certain ages. Accordingly a yoimg person can take out in- 
surance at a smaller premium rate than a middle-aged person. 
The rate increases as one grows older and death becomes more 
imminent 

If these premiums are not paid when they are due the 
policy becomes forfeited; but the company must give notice 
to the person whose life is insured, or to the assignee if the 
policy has been assigned, and notice to him again each time a 
premium becomes due. The company may extend the time of 
payment or take a note for the amount. 

In fraternal insurance the members of the association are 
usually not charged premiums but are assessed on the basis of 
their interest in the common fund. Sometimes these assess- 
ments are made from time to time and a fund accumulated; 
more frequently they are made when some member dies and 
Ms family becomes entitled to the benefit. 

Note: 

I. It is much cheaper to take out insurance early in life. 



§ 340. Agents 

Life insurance agents, as well as fire insurance agents, must 
procure a license from the state department in charge of in- 



LIFE INSURANCE 



285 



surance. In New York these licenses have to be renewed every 
year. (See Part IV on the general subject of agency.) 

§ 241. Right to Change Beneficiary 

Unless there is a clause in the policy reserving the right to 
change the beneficiary, no change can be made without his 
consent in writing. The beneficiary has a vested right in the 
policy — one which he can himself transfer to someone else. 
In some states, even if he dies before the insured, the profits 
of the policy will go to the beneficiary's estate and no one else 
can be named. 

The beneficiary cannot be changed without his consent if 
the insured has taken out the policy under an agreement with 
him, or if the beneficiary has paid any of the premiums. 

The consent of the company must always be obtained to 
any change of beneficiary. This consent must be in writing. 



Note: 
I. 



The policy should always contain a clause permitting 
a change in the beneficiary. If such a change is 
not provided for, anyone taking the policy as se- 
curity must get the written consent of the bene- 
ficiary to the arrangement 



§ 24a. Assignment of Policy 

A policy of life insurance belongs to the insured if he 
has taken it out and by its terms has the right to change the 
beneficiary, or to make his own estate the beneficiary. 
The beneficiary in such case has only a contingent in- 
terest, and has nothing he can assign to anyone else. If, 
however, under the terms of the policy the insured cannot 
change the beneficiary, then the beneficiary has a vested in- 
terest and he alone can assign it. The company must be notified 
of any assignment. 



a86 



INSURANCE 



LIFE INSURANCE 



2%^ 



§ 243. Settlement of Losses 

When he makes his claim for the proceeds of the policy, 
the beneficiary must send with it a proof of death filled out on 
one of the company's forms and certified by a physician. 

Where there has been a change of beneficiaries or the 
policy has been used as security, there may be conflicting claims 
for the proceeds. If the various claimants can agree among 
themselves, the company will generally pay the loss to those 
who are admitted to be entitled to it, upon receiving releases 
from all the claimants. If there is a dispute which cannot be 
settled otherwise, it usually has to be decided in court 

The company will resist the payment of claims if there was 
any fraud in the procuring of the policy or if misrepresenta- 
tions as to the health of the insured come to its knowledge. In 
one case known to the writer, the beneficiary in the proof of 
death made a statement as to the age of the insured person 
which differed from that made in the policy. The company 
discovered that there had been a misrepresentation and re- 
sisted the payment of the claim. 

Suicide, unless committed within a year from the time the 
policy was taken out, does not generally excuse the company 
from payment. Many policies provide that if the insured is 
killed while engaged in the commission of crime or executed 
as a punishment for crime, the policy will not be payable. The 
death must be the result of the crime in order to render the 
policy void. Dying of apoplexy while attempting to hold up 
a train would not excuse payment. 

Notes: 

I. In order to make sure that the proceeds of a policy 
will go to the person whom the insured intends to 
benefit, without an expensive lawsuit, it is wisest, 
when making any change in a policy, to get a 
written release from any party who may be af- 



fected by the change, and keep it attached to the 
policy. 
2. Under the New York law, creditors can collect all 
insurance over the amoimt a $500 a year premium 
will bring. 

§ 244. Government Insurance for Soldiers and Sailors 

At the entrance of the United States into the Great War, 
the government announced, as a substitute for the pension 
system, a plan of insurance for officers and men of the army, 
navy and marine corps. Under this plan, the government 
undertook the costs of administration, and offered term in- 
surance on the monthly income plan. (See § 238.) 

The term extended from the beginning of the war to five 
years after the declaration of peace. By the monthly income 
plan is meant a system of paying the beneficiary, not a lump 
sum to be kept as capital, but a monthly sum to be used as 
income, payment to run in this case, for a period of twenty 
years. By this system a man taking out the maximum insurance 
of $10,000 would pay approximately $6.50 per month for it, 
the rate increasing slightly each year. In case of his death 
from any cause his beneficiary (who must be a relative) re- 
ceives $57-50 each month until 240 payments have been made). 

Within about six months after the armistice was signed, 
the government announced a plan of converting any of these 
term policies into one of six forms more closely resembling 
ordinary commercial insurance. The new forms offered pro- 
tection to ex-soldiers, sailors and marines for the remainder 
of their lives. Conversion may be made at any time within 
^\t years after peace has been declared; if not made at all, 
the insurance simply stops. 

The six policies now offered holders of the original term 
insurance are: 



1 1 



288 



INSURANCE 



LIFE INSURANCE 



289 



"t 



I. 

2. 

6. 



Ordinary life 
Twenty-payment life 
Thirty-payment life 
Twenty-year endowment 
Thirty-year endowment 
Endowment at age of sixty-two 

In all cases except where the policyholder lives to draw 
the endowment himself, the benefit is paid on tlie monthly 
income plan, payments covering twenty years. A disability 
clause is attached to all these policies, whereby if the policy- 
holder is totally and permanently disabled, the government 
waives premiums and pays him for the remainder of his life, 
the monthly income his beneficiary would have had. This 
deprives the beneficiary of any payments except where the 
insured dies before 240 payments are made to him. In such 
a case, the beneficiary receives a monthly income for the re- 
mainder of the twenty years. 

All matters relating to this subject are controlled by the 
Bureau of War Risk Insurance, Washington, D. C. In case 
the Bureau gives an adverse decision on any claim, appeal may 
be taken to the federal courts. 



5. 
6. 

7- 
8. 



afterwards his son wrote the office of the company in care 
of the president, and told him that his father was ill, and 
asked that the time be extended. The president wrote back 
that if he would pay the premiums within one week it would 
be all right. Williams died the following day, and before the 
week elapsed, the son came and tendered the premium, which 
the company declined to receive, and denied any liability on 
the policy. Is the company liable thereon? Give your reasons 
for your answer? 

Can the beneficiary be changed? 

When can the beneficiary assign his rights? 

Why did the government arrange to insure its soldiers and 
sailors ? 

Into what forms was this converted at the close of the war? 



I 



1 



I. 

a* 



Review Questions 

What is meant by an insurable interest in another person's life? 

What are the three methods of life insurance? Explain each. 

Explain the following classes of policies: Participation, non- 
forfeitable, whole life, limited payment life, endowment, and 
term. 

4. One Williams had a life insurance policy in the American Life 
Insurance Company for $10,000. The policy provided that if 
the annual premium was not paid on the day it became due 
the policy should become void. Williams became ill and failed 
to pay the premium on the day it was due, and about a week 



SUNDRY INSURANCE CONTRACTS 



291 



l! 



CHAPTER XXXIX 

SUNDRY INSURANCE CONTRACTS 

§ 245. Enumeration 

In addition to fire and life insurance, there are sundry 
other insurance contracts, such as marine, accident, health, 
group, liability, title, burglary, plate glass, automobile, boiler, 
burial, credit, fidelity, hail, live stock, rent, strike, and tornado. 

In all of these the policies call for certain representations 
which must be truthful ; and proofs of loss must be made out 
and, as a rule, sworn to, when payment of a loss is claimed. 

§ 246. Marine Insurance 

This is the oldest form of insurance, older than either fire 
or life insurance. It originated in Lloyd's Coffee House in 
London, and the policy is known as Lloyd's. The policies were 
passed around among the dealers in insurance, and each took 
such share of any given risk as he cared to. These subscribers 
were called underwriters and in case of loss they were assessed 
in proportion to their subscriptions to pay the loss. The busi- 
ness is handled by regular incorporated companies today. Its 
object is to protect the insured against losses on a vessel at 
sea. Marine policies may also be taken out on ships traveling 
m any navigable waters. 

The policy covers losses by fire, various forms of ship- 
wreck including losses incurred in trying to avert shipwreck, 
and losses from piracy. The insured is by custom held to be 
in duty bound to give the insurer all information in his power 
with regard to the ship, the voyage, the cargo, or anything 
else that might affect the risk. If he conceals anything or 

290 



I. 



2. 

3. 



makes any false representations, the policy will not take 
effect. The person taking out marine insurance must fulfil 
the following requirements: 

He must have an insurable interest in the goods or 

vessel insured. 
He must warrant that the vessel is seaworthy. 
He must warrant that the goods insured were in good 

condition when taken on board. 

If any of these conditions are not met, the insurer will not be 
liable. 

In a marine policy, the amount payable in case of loss is 
fixed by the policy, and no attempt at valuation is made unless 
the loss is incomplete. Marine policies also cover what is 
known as general average. 

Proofs of loss, giving full particulars of the nature, 
amount, and cause of the damage must be made out and sworn 
to by the master and crew of the vessel ; and then an investiga- 
tion is made either by some government surveyor of the port, 
or by experts chosen by the parties to the contract. In the 
event of a dispute as to the amount of the damage, the 
damaged goods are sold at auction and the amount determined 
in that way. The insured must show bills of lading or other 
documents to prove his ownership of damaged goods, and the 
policy cannot be assigned without the underwriter's consent. 

In the American Lloyd's policies it is provided that if there 
is any prior insurance on the vessel the underwriters shall be 
liable only to the extent that the prior policies do not cover 
the loss. 

§ 247. General and Particular Average 

From the eariiest times, it has been the custom, where 
goods were jettisoned (i.e., thrown overboard at sea to save 
the vessel), for the other owners of merchandise on board and 



iwusiuaiiiitiiittb 



aga 



INSURANCE 



SUNDRY INSURANCE CONTRACTS 



293 



III 



the owners of the vessel to contribute proportionately to make 
good the loss. This is called "general average." In calculating 
the assessment the owner of the lost goods is included; it 
follows that he is never reimbursed by general average for his 
full loss. The assessment is a lien against the goods until the 
entire amount is paid. The underwriter takes upon himself 
the responsibility of collecting this contribution. 

The term "particular average" is applied to the payment for 
partial loss. This refers to actual insurance on the particular 
thing or goods insured and is paid by an insurance company. 
The clause reads generally to this effect: "no partial loss or 
particular average shall in any case be paid, unless amounting 
to 5 per cent" Then if less than 5 per cent of the goods is 
completely lost, no claim at all can be made against the in- 
surance company; or if the whole cargo is damaged to a slight 
extent, no claim can be made. The term to indicate that a 
policy does not cover partial losses, is "free of particular 
average," often abbreviated to F. R A. The opposite term, 
indicating more complete insurance at a higher rate, is "with 
average" (W. A.) or "against all risks" (A. A. R.) 

Note: 

I. Anyone taking out a marine policy should be care- 
ful to note just what dangers it protects against, 
especially what provision it makes in case of war. 
In the Lloyd's policy it is necessary to make a 
special arrangement, as the ordinary policy ex- 
pressly releases the insurer from damages arising 
from the perils of war. 

. § 248. Accident Insurance 

Accident insurance is insurance against injury or death by 
accident. The policy may cover injury only, or it may also 
provide for a payment to a beneficiary in case of the death of 



the insured by any accident. The proceeds are payable to the 
person himself in case of injury. These policies do not cover 
mere illness, but such things as ivy poisoning, etc., which arc 
regarded as accidents, are included. 

Sometimes there is a dispute as to what constitutes an acci- 
dental injury. Thus, although infected water might be drunk 
through accident and serious illness result, one could not col* 
lect an indemnity; whereas one could collect on injuries due 
to inhaling gas, poison taken by mistake, etc. 

Many companies will not pay if the insured exposed him- 
self to unnecessary risk such as jumping on a moving street- 
car ; nor will they pay for injuries received while intoxicated, 
though in this regard there is sometimes great difficulty in 
deciding if a person's intoxication were such as to make him 
more liable to injury, and if it were not they would have to 

pay. 

All accident policies provide lump-sum indemnities for 
such injuries as the loss of a hand, etc. 

§ 249. Health Insurance 

Some companies insure against sickness and ill health. 
Usually these policies name a list of diseases in event of which 
a weekly indemnity is granted. In some cases the health 
insurance is allowed only in conjunction with accident insur- 
ance. Some of the fraternal orders allow their members sick 
benefits which are the equivalent of health insurance. Practi- 
cal difficulties in administering the business of insuring against 
sickness have limited its development. A savings account is 
probably the best provision against ill health. 

§250. Group Insurance 

Group insurance is a plan to insure a number of the em- 
ployees of one employer offering an eligible group, without 
individual medical examination, under one blanket contract 



ill 



294 



INSURANCE 



SUNDRY INSURANCE CONTRACTS 



m 



issued to the employer. It is generally applied only to life 
insurance though the principle of insuring a group could 
logically be applied to accident and health insurance at least. 

The premiums for this insurance are paid monthly by the 
employer and the insurance is payable to the beneficiary named 
by the employee. Ordinarily the basis of insurance is one 
year's salary with a maximum of $3,000 to any individual. 
Any employee receiving annual remuneration in excess of that 
sum would receive only $3,000 insurance. 

If it is desired by the employer, the insurance company will 
settle the insurance benefits in twelve monthly payments. This 
would amount to a continuance of the pay check for a full 
year in the event of death while in service— during which time 
the beneficiaries would be able to adjust themselves to the 
changed conditions caused by the death of the breadwinner. 

The operation of the plan is simple. New incoming em- 
employees are automatically included upon passing a simple 
health test and the insurance by the employer on outgoing 
employees ceases upon termination of service. 

The cost depends on the age and annual wage of each 
employee. It would be approximately ij4 per cent to i J^ per 
cent of the annual pay-roll. 

§ 351. Liability Insurance 

Liability insurance is to protect the employer from liabili- 
ties arising under the Employers* Liability or Workmen's Com- 
pensation Acts. (See §§ 279, 280.) In many states it is 
possible to take out this form of insurance with a state fund. 
There is also automobile liability insurance, which covers lia- 
bility for injuries to others resulting from the use of the auto- 
* mobile. Railroad companies may take out insurance (carriers' 
liability insurance) to protect them against liability to pas- 
sengers and others, for injuries arising from railroad acci- 
dents. 



29s 



§ 352. Title Insurance 

In order to protect purchasers of real estate against the 
expense of lawsuits arising from possible defects in the title 
to the property, a business of investigating and insuring the 
title has grown up. Title insurance companies generally fur- 
nish both title searches and insurance. As with most other 
insurance of this nature, the company generally settles the 
claim or defends the suit on notice from the insured that he 
has been served with a notice of suit 

§ 253. Burglary Insurance 

This is one form of what is known as casualty insurance, 
that is, insurance against accidents to property of various kinds 
other than loss by fire. It is, as the name implies, insurance 
against loss of property by theft. It applies only when the 
theft is committed by someone breaking into the house or 
building where the property is kept, unless the policy states 
otherwise. It would not cover having one's pocket picked. 

§ 254. Plate Glass Insurance 

This is insurance on large plate glass windows because of 
the great expense of replacing them. It also is a form of 
casualty insurance. Where the windows are injured in a fire, 
if there is any insurance other than the glass insurance policy 
on them or on the building, only an amount proportioned to 
the relation of that policy to the whole amount of insurance 
on the building can be collected on the plate glass insurance 
policy. 

§ 255. Automobile Insurance 

Many companies offer automobile insurance. What is 
known as a full cover on an automobile includes insurance 
against the hazards of: 



296 



INSURANCE 



SUNDRY INSURANCE CONTRACTS 



297 



m 



m 



ii|i 



1. Fire or explosion. 

2. Transportation, i.e., derailment and coUisioa 

3. Theft. 

4. Damage by fire to personal effects carried upon the 

car. 

5. Damage to other property by being in coUision with 

the automobile insured— known as property dam- 
age. 

6. Damage to the automobile insured by being in col- 

lision with some other object 

7. Loss of life or injury to the occupants of the car and 

legal liability for expenses in connection therewith. 

8. Loss of life or injury to others and legal liability for 

expenses in connection therewith. 

The rates are high to compensate for the very considerable 
risks. What is known as the "moral hazard," i.e., the risk of 
unfair dealing by owners, is great, and hard to guard against. 
The enumeration of hazards shows the varied possibilities of 
loss and damage. 

§ asC. Other Forms of Insurance 

BoUer Insurance. This is insurance against injuries to 
property arising from boiler explosions, another form of 
casualty insurance. A fire insurance policy does not cover 
such a loss unless the explosion resulted from a fire. 

BurUU Insurance. This form of insurance is in operation 
among the very poor. In return for certain weekly or monthly 
payments, the company guarantees to pay the expenses of a 
decent burial. 

Credit Insurance. Credit insurance is insurance against 
*the dishonesty or the insolvency of debtors. 

Fidelity Insurance. Fidelity insurance is insurance against 
losses arising from fraud or dishonesty on the part of agents 
or employees. There are three forms of fidelity bonds: first. 



the larceny or embezzlement bond; second, the culpable neg- 
ligence bond ; and third, the faithful performance bond. The 
last is the most comprehensive and the most costly. 

Hail Insurance. This is common in the grain states, where 
the farmers often suffer heavy loss because of the damage hail- 
storms do their crops. 

Live Stock Insurance. Blooded animals are so valuable that 
their owners find it necessary to protect themselves against 
loss by carrying insurance against disease or death. 

Rent Insurance. This is insurance for the loss of rents 
owing to the failure of tenants to pay rent, or to a destruction 
of the property by fire or some other calamity. 

Strike Insurance. An employer can even insure himself 
against strikes on the part of his employees, and the consequent 
losses. 

Tornado Insurance. As its name indicates, this is insur- 
ance against damages and loss of property arising from tor- 
nadoes. 



Review Questions 

1. What three requirements are essential to the contract of marine 

insurance ? 

2. Has a stockholder an insurable interest in a steamboat owned 

but not insured by the corporation? 

3. What is "general average"? 

4. What is "particular average"? 

5. What risks are usually covered by an accident insurance policy? 

6. What is group insurance? 

7. What is the usual purpose of liability insurance? Who takes 

out the policy? 

8. What is title insurance? 

9. What does the owner of an automobile want insurance against? 
10. Who takes out fidelity insurance? What is the simplest form? 

Under this form could the holder of the policy recover if his 
employee lost the money ? 



Wit 



n\ 



- 

i 

ill 



i! 



Hi 



nil 



4il!l 



«lll 



ill 



f : 



fill 



PART VII 



EMPLOYMENT 



ill 



r, I 



CHAPTER XL 

THE CONTRACT OF EMPLOYMENT* 

§ 257. Introduction 

The contract of employment is perhaps the one which most 
concerns the ordinary man in his every-day affairs. All the 
relations between employers and employees are governed by 
contract and the laws regulating the subject. In recent years, 
these laws have undergone almost a revolution ; and they are 
still being rapidly changed to meet the modern ideas of what 
such relationships should be, and the new sense of the obliga- 
tions which the employer owes to those under him. It is most 
important for everyone to know exactly what these changes 
in the law are, and how they may affect him individually. 

The Federal Employers' Liability Act, which defines the 
rights of all employees engaged in the business of interstate 
commerce, has been followed in many of the states by acts 
of like tenor ; and various efforts have been made to introduce 
some of the schemes for workmen's compensation and old-age 
pensions from abroad. Both of these plans have already been 
adopted in some of the states ; and, it would appear from the 
trend of modem legislation, they are likely in the near future 
to be enacted into some form of law in most states of the 
Union. 

Too much importance cannot therefore be given to the con- 
tents of this particular chapter. For this reason the subject of 
the relations of employer and employee has been treated with 
some fulness of detail. 



*FoT forms of contract of employment, see Chapter CIV, Forms 46, 49. 

SOI 



302 



EMPLOYMENT 



THE CONTRACT OF EMPLOYMENT 



303 



III 



IHll' 



! 35a Definitton 

A contract of employment is a contract for the performance 
of services, by the terms of which the employer is to direct how 
tibe work IS to be done and what results are to be accomplished. 
This personal direction by the employer is the essential fea- 
ture. A contract with a tailor for a suit of clothes is not a 
contract of employment because it lacks the element of per- 
sonal supervision. 

In the older law books the subject of this part of the book 
was treated under the head of "Master and Servant " It is 
far from modem habits of thought and speech to consider 
a member ol a labor union or the auditor of a corporation as 
a servant. Hence, the obsolete terms are not used in this 
work. 

§ 359. What Constitiites a Contract of Employment 

There must be an agreement by competent parties. One 
party agrees to perform services for the other. There must 
be a consideration. One party gives his services in return for 
the payment of wages or salary by the other party. The con- 
tract may be expressed or implied. If a man does any work 
for another on request, the law wiU usually imply a contract 
to pay a reasonable compensation. If services are rendered 
for another with his knowledge and acquiescence, a contract 
is usually implied. 

A contract to do work on shares is an agreement by one 
party to perform some labor, such as raising a crop for a 
share m the crop. For instance, a man may agree to cu't grass 
for a land owner for half the grass. Such contracts are com- 
mon in farming communities. The fact that the wages arc 
paid otherwise than in money does not alter the relationship 

As has been stated (§ 258), the peculiar and distinguishing 
element of the contract of employment is that the party for 
whom the services are to be performed has the right to direct 



the other party in what he is to do. A contract to build a house 
where the builder merely agrees to construct a house according 
to certain plans to be furnished by an architect and to the 
satisfaction of the person for whom he is building it, is not a 
contract of employment. But where a man agrees to do the 
manual work of building the house under another's orders as 
to how it shall be done, he is that other man's employee. 

The essential element of the relation of employer and 
employee is the right of the employer to give orders to and 
direct the employee in the performance of his work. 

Most of the work on public buildings, roads, canals, etc., 
is done by letting the entire contract to a contractor who in 
turn lets out parts of it to subcontractors. The question of the 
liability of the main contractor to the employees of his sub- 
contractors rests on this principle. If the employees are taking 
orders from his foremen, the chief contractor is liable to them 
as he would be to his own employees (see § 271 ). If the sub- 
contractors are to do their own directing and give the orders 
to their own men, being responsible to the main contractor 
only for the finished results of the work, then he is not liable 
to their workmen any more than he would be to outsiders. 

§260. Independent Contractors 

Independent contractors are not employees. An inde- 
pendent contractor is a man who engages with another to hand 
over to him in completed form some particular piece of work, 
and to receive a certain sum of money for doing it. In build- 
ing, the excavating, the mason work, the plumbing, and the 
painting are usually undertaken by such independent con- 
tractors. 

Where a contractor merely engages to do a piece of work 
for another and retains the right to direct its doing himself 
through his own foremen, his employees do not ordinarily 
stand in the relation of employees to the person with whom he 




304 



EMPLOYMENT 



has contracted. Sometimes, however, the law says they shall 

Most of the state enactments as to employers' liability and 
^Ws compensation give employees'o/independ nT i:. 
toactors the same nghts against the principal contractor that 
his own workmen have. ""tractor mat 

§ 36i. Interpretation of Contract 

U.h^t Tjf u ^ ""P'°y™^»t is to be interpreted in the 

Ihe same rules that apply to contracts in general govern this 
type of contract. (See 8 40 ) In raeo th» „ • • 
indpfin.f. ♦!,- „ .• ^ ^y--' ^" *^ase the provisions are 
indefinite, the question as to when it will be understood to 
begin and to end is answered in § § 265. 266 ^^"^^"^ ^ 
Any weU-recognized customs in the particular trade or 
busmess to which the contract under coLderatL 'eiateT 
sudi as a custom of paying a certain percentage as omm s on 
o msurance agents, etc.. wiU be considered in seekTng to Sd 
the meaning of the contract. ^ ° *"* 

§262 An Express Contract Camiot Be Proved by Custom 
it UnT""^''! '° ^r' ^ "P*"^'^ ~"t'^<=t of employment 

fs SiL S m^ir'' '" ""^"^ ^"^^'^ ''''''''''■ The house 
is entifled to make a separate contract with every emolovee- 

the duties and rights of each employee are regdl^ted Jv S 
contact without regard to dealings with otSerXtyeef 

For instance, m an Alabama case, an employee dafmed that 
there was a custom in the firm to engage emDlov!«K .? 



THE CONTRACT OF EMPLOYMENT 



305 



Sometimes provisions may be read into a contract from 
customs which are universally known in the line of business in 
which the contract of employment was made. For instance, 
if there was a universal custom to pay employees by the week, 
the court might find from the testimony that both parties had 
it in mind at the time of the making of the contract. In order 
to prove this to be the fact, however, the custom must be so 
universal that everybody in the business ought to know of it, 
and either party may prove that they expressly agreed other- 



wise. 



Note: 
I. 



In making a contract, it is not safe to rely on custom. 
All provisions of the contract should be stated 
expressly. 



§ 263. Wages 

Wages are payable by the day, the week, or the month 
where the contract expressly provides that they shall be, or 
where it is the custom to pay in that way, so that the parties 
might be supposed to have intended to make it part of their 
agreement. If there were no such custom and the contract 
said nothing about it, the employee would not be entitled to his 
wages until the end of the entire period for which the contract 
was to run. 

The custom of paying wages at short periods, by the week 
or month for example, is pretty well established. If the parties 
desire to arrange otherwise, it should be so stated in the con- 
tract. 

§ 264. Modification of Contract 

The contract of employment, like every other contract, may 
be altered by the consent of all the parties to it. The question 
of whether there must be consideration or not, or what con- 



3o6 



EMPLOYMENT 



stitutes consideration for the new contract, has already been 
taken up under the subject of contracts in ge;eral. ( S^g ^ 

§ »65. When Contract Begins 

Where the contract does not state when it is to berin it 

k^eSr for r^ ' il"*" '' ""P'^y"' t° »« as book- 

bSitrsSf ° '"^" "^ "°'' °' ^'^^ •^'^ -^^'^ -tU the 
Nate: 

I. Both parties should see that the time when the em- 
ployment is to begin is made part of the contract. 

§ a66. Tennination of Contract 

end. t w II end when either party desires to terminate it If a 
definite time is fixed for the payment of wages, snh as a 

SiJ^ y; ' "'f ' "^^ ^^"^^^^^ ^*» ^-^ ^- -t least 
that penod of time, and camiot be terminated before If the 

Z^^rr -t^ "^^ ^''^' '"""^' ^'^ y^^^' ^^ cannot be ter. 
mmated by either party except at the termination of such a 

penod. If the employer discharges the employee (excS for 
good cause before the end of such a perioS, he w U SuaWe 
for the employee's wages until the end of the period 

felt lu^l """^^r"" ^"''^"' ^" "^^ P^"^' ^' ^i"' strictly, for. 
feit all claim for compensation. Some courts allow in such 

SrJvHf" ^"'"^^t^^'PWee can show for his services, 
less any damage caused by his leaving before his time was up 
* Notes: 

I. A defmite understanding as to the duration of the 
employment is better for both employer and em- 



THE CONTRACT OF EMPLOYMENT 



307 



ployee. It will avoid unpleasant disputes and may 
save a lawsuit. 
2. Both employer and employee should act fairly about 
terminating the employment. To leave without 
notice at end of period or to discharge without 
notice at end of period is in most cases unfair. 

§267. Termination of Contract by Breach 

A contract of employment may end either when it is com- 
pleted, or when it is broken by either of the parties to it. 

What the Employee May Do. On the part of the em- 
ployee, the contract may be broken either by leaving the 
employment or by doing something which would justify his 
employer in discharging him — by acts of disobedience or insub- 
ordination, or by acting contrary to his employer's interests. 

The disobedience or insubordination must be such as will 
prevent the employer from being able to rely on the employee 
to do good work. And the employee is under no obligation 
to obey an order to do anything not called for by his contract. 
A department store owner discharged the head of his dress- 
making department because she refused to obey his orders 
to perform the work of a seamstress. The court held the 
discharge a breach of contract. 

Either incompetence or habitual drunkenness constitutes 
a breach of the contract. The employee undertakes to be 
only reasonably competent, however, and he cannot be dis- 
charged for not being an expert, unless there is some express 
understanding calling for a specified degree of skill. 

An illness of the employee which keeps him from work 
also puts an end to the contract, though it may hardly be re- 
garded as a breach. 

What the Employer May Do. The employer may break 
the contract either by discharging the employee without justi- 
fication, or by rendering the work in some way unsafe to his 



1^, 



3o8 



EMPLOYMENT 



THE CONTRACT OF EMPLOYMENT 



309 



I ' 



health. h.s hfe. or his morals. Or he may break it by re- 
qmnng the employee to work for less wages Aan we agre^ 
upon or to perform different services. He can make noni 
of these requirements without the employee's consent 
lations'^nr'' ^^TP'^y^*^"* is one involving personal re- 

partTe TheTr ^. r^^ '^ "*^^ °^ the contracting 
part.es. Therefore, ,f the employer sells out his business to 

other parues. h.s employees cannot be compelled to work fo^ 

a Lrcr-f "^ r'°^^^ ''''- ^ p^^*-- -"^o- 

far Z th?; , ' "" ^'°"''' incorporated, the result, so 

in^In'orh-7ff ^ or insolvency of the employer or the wind- 
mg up of h,s affairs by a public officer, as in the case of a 

ilr.'".^"'"''"" '"'"P""^ '" ^S*^ °f »«>Ivency. puts 
an end to the contract. ^ 

will?.'. W.*^* f 7"'°^"' ''^ "° ^^'•'^ fo"- «n employee 
wdl not justify a discharge before the end of the contract 

Notes: 

1. In selling out a business, or changing the nature of 

a business, an announcement of the new arran^e- 
ment should always be made to the employees. 

2. Remainmg m the employment with knowledge of 

the change amounts to an acceptance of the new 
arrangement. 

§a68. Rights and Remedies 

In any case, except where the employee has been guilty 
o actua disloyalty to his employer by engaging in compel 
mion wuh him, or has offered physical violence to his emt 

whfrh .'' Tf '" '^' ^'^'^' '"^'^y^ ^' commissions 
which he has already earned, and, if a bonus has been de- 

dared, he is entitled to that too. This is true whether the 



breach of the contract is due to his own action or to that of 
his employer. (See also § 273.) 

Employee's Rights to Damages. Where the employer is 
guilty of a breach of the contract, the employee is entitled to 
damages. He may sue at once and collect what is already 
due him, or he may wait until the contract period is over 
and then sue for the total damages he has sustained. It is 
his duty to try to obtain other employment, and the damages 
which he may recover are limited to the difference between 
the wages he would have received and any sums which he 
has been able to earn since. 

Where the wages or salary are to be paid at stated periods, 
the courts in some states allow the employee to sue at the end 
of each period for the amount then due him ; as for instance, 
where the wages are payable by the month, at the end of 
each month. In other states the employee may bring only 
one action, and if he sues before the end of the contract 
period he may recover only such damages as he has suffered 
up to that time, and will have no further remedy. 

Where a contract of employment provides for notice on 
both sides, the employer must give the required notice or pay 
the employee wages for the period of notice before discharg- 
ing him; and if he fails to do this the employee is entitled to 
recover this amount as damages. 

Employer's Grounds for Damages. If the employee breaks 
the contract, the employer is entitled to recover any damages 
he can prove. He must prove that it is impossible for him to 
procure anyone to do the work in the employee's place. He 
cannot recover any damages if the employee leaves his em- 
ployment because of illness. He will be entitled to retain 
wages equal to the amount of notice the employee is required 
to give, only in case there was such a provision in the contract. 

Interfering Between an Employer and Employee. If a 
third person, knowing that a workman is employed by another 



3IO 



EMPLOYMENT 



l^™'" 



and that the term of his employment is not over induces an 
employee to leave his employer before the clm;act of e^ 
Ployment has expired the third person is responsibe toX 
^P^oyer m damages should he have acted with full knowkd^e 
of the circumstances. Knowieage 

with"hfm*ifter'Tt-"'^Tu'" ""^'^^^ *° '"^'^ « ^^n^^ct 
r„ th. , . ^^ °^ •"' '""^-^^ ^'th Ws employer is 

fL f<S," ? contract himself and then obtains employment 
If a third person succeeds in getting an employer to dis 

tt:^^n""fet 'Tr ''- ' -^^'^ °^ ^^^ 

uiat person. But if the third person merely attemots to in 
fluence Ae employer and is unsuccessful, the e^S h" no" 
ground for action. ""pioyee nas no 

R^^ences. The employee has no legal right to a 
reference. But nowadays the custom of givinf reference has 
become m some places so universal that h ah^oS S^Zts to 
an miderstood part of the contract *° 

Note: 

I. Contracts providing for notice should specify a 
definite toe and a definite amount of wages to 
be forfeited on the nart nt n,- • , 

fa;i..~ *^ "" ine part of the employee for 
lauure to give noUce. 

§a69. Employment After Expiration of Contract 

and^""' ? '°"*'''* ''*' ^ •'^'^™** t™« for its termination 
and the employee continues in the employment after™ at ti° I 

without any new understanding, the'ge^ral^e Js C" 
Ae work whid, he is doing is the same, he is supposS to hive 
been employed on the same terms ' 

The new contract in such case will be for the same time 



THE CONTRACT OF EMPLOYMENT 



311 



as the old. For instance, if a workman hired for a year re- 
mains in his employment into the second year without any 
new agreement, it will be presumed that he was working under 
an agreement for another year ; and it will be a breach of the 
contract, for which the employer will be liable in damages, if 
he discharges the workman before the end of this time. The 
employer, however, may, if he can, show facts to prove that 
there was no such understanding. 

Note: 

I. In this case again, it is safer to have a definite 
understanding about any renewal of the contract. 



Review Questions 

1. What is the distinction between an employee and an agent? 

2. Is a salesman working on commission an employee? 

3. What is an independent contractor? 

4. When an employee is working by the week or month and leaves 

without cause during the period, what are his legal rights in 
your state? 

5. What causes would justify the discharge of an employee? In 

such cases would the employee be entitled to compensation 

up to the time of discharge? 
C What causes would justify an employee in leaving before the 

expiration of his period of employment? 
7. In what ways in your state may an employee seek redress for 

an employer's breach of contract for a fixed salary payable 

at regular intervals? 



liiW 



CHAPTER XLI 

RELATIONS OF PARTIES 
§ 370. Duties of Employee to Employer 

repr«em7h1Zl''f T""^ '"''' *"^ *=°"*"^ «' employment 
represents himself to be reasonably competent for his work 

«lw J5 ""^fj^'' J-e is not r'equired to havrt^y 

E X' T ^ f '"• ^ '•^^"^"'^ *'-- to 'earn its 
duties. Where the work requires skilled labor, such as in 

han^ng machmery etc. the employee is requir;i to be J 

ST^LZitlfZ TT^I-- '' ^"^ '^Sh degree of sk 1 
IS reqwred, it must be stipulated in the contract 

^ t^^S^,^S^ f ''^'^^ '•^ '^^"^ l'*^ *d not come 

Z^.Zi"^ ""^"'"^ °* •"'•"' *' '^^"rt '"'"le them Z 

pitch as well as the average professional player « 

n,n Jr' T."^/ P™'^'^°" '" ^'^ *^°°t"^t that the employee 
2Z^e^"^°Vl *' ""P'°^"- ^" ™-' «t«t« even 
satosfaction before he may discharge his employee. 

refu^^s 'ut ""^ r ~"P^ "" ""P'°y" to ^ork if he 

Ae b'ich of L^To f'.'T P"^" *^' ''^ ''=« ^"ff-ed by 
tne breach of the contract, the employee is liable to the em 

The e mployee must perform the services stipulated in the 

.a L^T^^*-* ««•» - «^««. .« Md. 3.,; as Alt .,,; ^ a„. S. Hc„ ,04; 

31a 



RELATIONS OF PARTIES 



313 



contract. It is not his fault, however, if their value to the 
employer is destroyed by the act of some third person, and 
the employer is none the less bound to pay him the wages 
agreed upon for them. For instance, in a certain Alabama 
case one Parham employed a man named Tucker to go into 
Mississippi and get back some slaves for him. Tucker got 
them back and they were immediately attached by a creditor. 
Tucker had nevertheless fulfilled his contract.^ 

Loyalty and Obedience, Other duties which the employee 
owes his employer are those of loyalty and obedience. He 
must not do anything which may injure his employer's busi- 
ness, and has no right to engage in any employment which 
is in competition with it. Otherwise, the employee has a right 
to use his spare time as he likes, unless he has agreed by the 
contract to devote his entire time and attention to the business. 

Sometimes, even in such a case, it has been held that the 
employee has a right to do something else which does not 
injure his employer where the employer fails to furnish him 
with work. In the California case of Stone v. Bancroft,' 
Stone, a publisher who had been employed by Bancroft to 
devote his entire time to publishing the historian's works, did 
some work on a medical book while he was waiting for Ban- 
croft to furnish him the manuscript The court held that 
Bancroft cotdd not complain, since he had given no work to 
the publisher. Bancroft was, of course, liable to pay him at 
the contract rate for the entire period of the engagement 

Part of the employee's duty of fidelity to his employer 
consists in keeping to himself any business matters of a con- 
fidential nature. If an employee discloses any secret processes 
— what are known as "trade secrets" — ^he is liable to his em- 
ployer for damages. 

Law clerks and lawyers' stenographers are privileged from 



'Wolfe ▼. Parham, 18 Ala. 44 !• 

« 139 Gal. 78 Pac. io«7; 7» Pac. 717. 



3^4 



EMPLOYMENT 



RELATIONS OF PARTIES 



31S 



1 



ti " 



testifying on the witness stand to any confidential communica- 
tions f roni clients. This privilege does not extend to ordinary 
stenographers, bookkeepers, or clerks on the witness stand. 

Ltabihty of Employer in Using Force. The duty of 
obedience cannot be enforced by the use of violence on the 
part of the employer. Formerly a master was allowed to 
chastise his apprentice on the ground that he stood in loco 
parentts (in the place of a parent) to him. But there is no 
justification for an employer laying his hands on his employee 
nowadays, and he would be liable to an action for assault 
and battery if he did so. 

Inventions. The patent rights to inventions which the 
employee makes in the course of his work belong to him and 
not to his employer, but it is probable that he would have to 
give the employer a right to make use of the inventions It is 
common nowadays for employers to make some provision in 
the contract of employment for taking over inventions made 
Dy their employees. 



Notes: 



I. 



Z, 



If the employer wishes anything more than ordinary 
skin from his employee, he must include the re- 
quirement in the contract. 

If the employer wishes to make any arrangement 
about inventions, he should come to an agreement 
with his employee and have that included in the 
contract. 



§ 371. Duties of Emplojrer to Employee 

The employer owes it to his employees to provide a safe 
healthful, and suitable place to work in, and proper tools to 
work with. To do this, he must arrange for suitable inspec- 
tion to see that things are in the proper condition and remain 
And it is his duty to hire competent fellow-employees. 



An employee is not required to expose himself to the danger 
of working with drunken, reckless, or incompetent asso- 
ciates. 

Responsibility of Employer, These duties of the employer 
cannot be shirked. He is always responsible for failure to 
perform them, no matter whom he appoints to attend to them. 
He must keep buildings, etc., in proper repair, examine ma- 
chinery to see that there are no dangerous defects in it, and 
inspect everything that comes to him from any other person 
to see that it is in safe condition before giving it to his em- 
ployees to work with. 

Co-operation of Employees with Employers. The law is 
reasonable. The employer is not responsible for an injury 
arising from an unknown defect, if he has used reasonable 
and proper inspection. He cannot be required to be continu- 
ally inspecting; therefore it is the duty of employees to inform 
the employer of any defects which they notice. If they do 
not, and suffer injuries, they must usually take the conse- 
quences; but at the same time the employer is in a better 
position to be aware of defects than the employee, and where 
the defect is a hidden one, it is the employer's and not the 
employee's business to discover it. 

It might be well to state that there are many regulations 
(hours, sanitation, etc.) which the statutes of each state re- 
quire, and that often it is required to post a copy of the law 
on the walls of store or factory. (See also §§ 279, 280, on 
employers' liability and workmen's compensation acts.) 

Limits of Liability. The employer will not be liable for 
the consequences of defects which nobody could have fore- 
seen and prevented, such as the flying off of slivers of steel 
from crystallization, a defect which cannot be discovered with- 
out a chemical test and the breaking up of the steel in order to 
perform it. And he is not obliged to employ experts specially 
to make chemical and other scientific tests. He is required 



m 



i 



316 



EMPLOYMENT 



m 

to make only the ordinary tests employed by those engaged 
m that occupation. 

If an employee is competent when hired and afterwards 
becomes reckless, drunken, or incompetent, and his acts take 
place without the knowledge of the foremen or superintend- 
ents, though these exercise reasonable supervision, the em- 
ployer cannot be made liable for the consequences of such 
acts. 

Provmon for Work, The employer must provide enough 
tTOls and employees to perform the work with safety to all 
And he must make proper rules for the conduct of the work 
and see that they are carried out. Where the law requires 
safety appliances, seats for women, etc., the employer must 
comply with it; but in the absence of any statute on the subject 
he IS not required to use the latest and best appliances if those 
which he has are such as are in ordinary use and are reason- 
ably safe. 

InstrucHon of Employees. It is his duty to instruct young 
and mexperienced employees in the proper way to make use 
of tools and machinery, and to warn them of any dangers 
He IS not responsible if his employees disobey his orders and 
are mjured in consequence; but if their disobedience has been 
going on for some time, so that it ought to have been known 
to the foremen and others in charge if they had been reason- 
ably diligent in their duties, or if it has been going on with 
their knowledge and consent, the employer will be considered 
to have consented to it and wiU be responsible for resulting 
injunes as though the rules had never been made. 

If he aUows young and inexperienced employees to work 
m places which tempt them to take risks, it has been held 
that he will be responsible for any injuries they may suffer 
m consequence. A case illustrating this point was that of a 
young boy set to work turning a wheel near the log carriage 
m a saw mill. The court said that it was tempting him to 



RELATIONS OF PARTIES 



317 



follow his natural instincts to ride up and down on the log 
carriage, and that the employer was responsible for injuries 
for putting him in such a place.* 

Employees Must Take Reasonable Care. After the 
employer has seen to the furnishing of sufficient and proper 
tools and a safe place to work, he is not responsible if the 
workmen themselves misuse them. When unfinished appli- 
ances, such as molds furnished in two or more parts to be 
put together, or lumber furnished for making a scaffold, are 
given to the workmen to be put together, if the men do the 
work improperly the injuries are not the employer's fault. 
But a permanent scaffold, such as those which are used to 
hold up steel framework until it is entirely finished, is part 
of the place to work. The employer would be responsible for 
its safety to any workmen other than those who erected the 
scaffold. 

Where the workmen furnish tools and appliances, the em- 
ployer is not responsible for the condition of such tools, nor 
for accidents which may result from using them. 

Necessity for Inspection. Where the work is construction 
work, so that the workmen are constantly altering it them- 
selves, the employer is liable only for proper and reasonable 
inspection from time to time, and not for accidents that occur 
from some alteration the men have made themselves. But 
when men are working in a position of danger where they 
cannot be at the same time on the lookout for the danger and 
engaged in work, someone must be stationed to warn them. 
And, in the case of railway work, where there are low bridges 
which are dangerous to brakemen who must ride on top of 
freight cars in order to look after the brakes, some system of 
"tell-tales" or signals to warn them to stoop and avoid danger 
is necessary. 

Further Liabilities of Employers. Employees are entitled 



* Marbury Lumber Co. v. Westbrook, 121 Ala. 179; 25 So. 793; 77 Am. St. Rep. 17. 



3i8 



EMPLOYMENT 



to all of this protection not merely while they arc at work, 
but also while they are coming to or going from their work 
over the employer's premises. Where a railroad company 
runs its trains over tracks belonging to another company, and 
an employee is injured in an accident due to defects in the 
track, the company is nevertheless liable to the employee. It 
is as much its business to inspect and see that the tracks over 
which it requires its employees to pass are in good condition, 
as it is for it to inspect cars whidi it receives from another 
company to see that they are in good condition before allow- 
ing the employees to handle them. 

If an employee of the company which owned the tracks 
were injured by any carelessness m running a train of the 
renting company, however, the company that owned the train 
and not his own company would be liable to him for his in- 
juries. His own company could have no control over the 
other company's trains, while the renting company would have 
control over the tracks it had rented. 

Special Contracts, It is not safe for an employer to rely 
on special contracts relieving him from liability. They are 
generally contrary to some special statute, such as the Work- 
men's Compensation Act, for instance, or else will be held 
contrary to public policy. 

Notes: 

I. The careful employer makes use of all the safe- 
guards possible for his employees, not merely as 
a matter of humanity, but as the cheapest policy 
in the end. 
The theory of the law in the matter of safeguards 
is excellent. The practice in many cases is bad. 
The workman is not usually able to enforce the 
law against his employer and loses his job if he 
tries. 



m* 



RELATIONS OF PARTIES 



319 



§ 272. Presumption with Regard to Joint Owners 

When a party is hired to work in an enterprise in which 
two or more parties are jointly interested, the presumption 
is that he is the employee of both, and may hold either or 
both liable for the duties owed to him by an employer. 

In one case, an employee was hired by Rumsey, one of 
the joint owners, to work on a steamboat, and received all 
his instructions from him. McMahon, the other joint owner, 
never came on the boat nor had any relations with the em- 
ployee. But the court held him liable for damages for injuries 
to the employee.** 



§ 273. Wages 

Wages are the compensation which the employee receives 
for his services. He may be paid in the form of a salary, or 
a fixed wage, or "by the piece" ; that is, the employee may be 
paid a certain fixed amount per dozen, etc., for the work he 
turns out. He may be paid in the form of commissions, 
i.e., a per cent of the price of goods sold, or of the amount of 
an insurance policy, etc. The amount of wages is determined 
by the agreement. 

Where the wages, or part of the wages, consist of net 
profits, the amount of the employee's salary must not be de- 
ducted from the gross profits in computing them. Nor may 
interest on temporary loans be deducted. The employer can- 
not take out for himself interest on his investment, before 
computing the net profits.' 

Wages must be distinguished from a bonus. A bonus is 
really a gift made by the employer to the employee. He may 
give it in the form of a reward for good work or may divide 
a certain percentage of the profits among the employees at 
Christmas; but in either case it is merely a gift and not 



1 



• McMahon v. Davidson, 12 Minn. 357. 

•Morrow v. Murphy, 120 Mich. 204; 79 N. W. 193; 80 N. W. 255. 



320 



EMPLOYMENT 



anything which the employee has earned under his contract 
of employment. If the bonus was specified in the contract of 
employment, so that when earned the employee could bring 
suit for it, it would be a misnomer to call it a bonus. It would 
be earned compensation. 

The employee is entitled to the wages which he has already 
earned even though his employer discharges him for good 
cause, unless he was guilty of bad faith and attempted to 
injure his employer's business or use physical violence 
against his employer. A superintendent who had attempted 
to sell blooded cattle belonging to his employer for less than 
they were worth was refused the right to recover unpaid 
wages.' 

Some states provide by law that wages must be paid in 
cash and make it a criminal offense to attempt to pay in orders 
on the company's store or merchandise. But even under such 
laws, the custom of issuing time checks which are redeemable 
in money, where the pay-days are put at reasonable intervals 
and not made purposely inconvenient to force the laborers to 
accept time checks, is permissible. 

Distinction Between Wages and Salaries. These laws are 
generally made for the benefit of laborers and do not apply 
to clerical workers who draw salaries as distinguished from 
wages. In the same way, the wage-earners, but not the salary- 
earners, are given in most states the right to collect their 
wages through enforcing a lien on the employer's property. 

The distinction is made in regard to manual labor as op- 
posed to any other sort. Typesetters and printers come under 
the head of manual labor; bookkeepers and proofreaders do 
not. 

Overtime. The law regulating the hours of labor gives 
the employer no right to overtime on the part of the workman 
unless it expressly says so. Generally, it is absolutely for- 

'Von Heyne v. Tomkint, 89 Minn. 77: 93 N. W. 901; 5 L. R. A. N. S. 5*4. 



RELATIONS OF PARTIES 



321 



bidden to allow employees on public works to work more than 
the time specified, i.e., eight hours a day in New York, and 
private employees may refuse to work for a longer time. If 
employees work overtime without an express agreement for 
additional wages, they are not entitled to them, and if the 
employer permits them to work less than the specified number 
of hours in any day, he is not entitled to require them to make 

it up. 

Where a contract of employment expires and the employee 
continues to work without any new contract, if he is perform- 
ing the same kind of services as before, he will be entitled 
to the same wages. 

Notes: 

1. The agreement for wages should not be left in- 

definite as to hours, overtime, etc. 

2. The disa4vantage of the single laborer in any dis- 

pute with his employer has caused the develop- 
ment of the labor union and much labor legislation. 

3. A minor has usually no right to his own wages, con- 

sequently an employer should not pay them to him 
without his father's consent, or he may find him- 
self under an obligation to the father. The wages 
should be paid to the father, or his written con- 
sent to their payment to the minor obtained. In 
New York the statute requires the father to give 
notice if he claims wages. 

§274. Fines, Deductions, etc. 

Fines can be imposed only for offenses in the course of 
the work. In the case of Cross v. Detroit Baseball Club,^ 
Cross was fined $75 for using bad language in an argument 



• 84 Mo. App. 526, 



332 



EMPLOYMENT 



« 



With the manager at a distance from the grounds. The court 
refused to allow the club to collect the fine. 

Deductions of wages for leaving without giving notice 
must be reasonable in amount The courts have held that 
indefinite deductions of aU wages then due are unjust, because 
they give the employer a chance to take advantage of his em- 
ployees by withholding their wages for long periods of time 

Fines for offenses must be agreed to by the employee. 
They should be mentioned in the agreement of employment 
or posted in the rules in a conspicuous place; and the em- 
ployee's attention must be caUed to them so emphatically that 
he cannot say that he was ignorant of what they were Merely 
posting up rules without calUng them to the employee's at- 
tention :s insufficient. 



Notes: 



I. 



2. 



In making an agreement that wages may be deducted 
if the employee leaves without giving notice, the 
exact amount to be deducted should always be 
stated. It should be a reasonable amount, as 
otherwise the courts may hold the agreement un- 
fair and refuse to enforce it 

Where fines are to be imposed, it is best to have a 
prmted copy of the rules imposing them made a 
part of the contract of employment, or given to 
the employees with an announcement that these 
are rules for fines which they should read care- 
fully. If any of the employees are illiterate, the 
rules should be explained. 



I. 

2. 



Review Questions 
What degree of skill must an employee have? 
Has an employer any rights in regard to the spare time of the 
employee? 



RELATIONS OF PARTIES 



323 



3. Is a bookkeeper privileged from testifying as to confidential 

information ? 

4. What is the law as to inventions made by an employee, where no 

provision has been made in the contract? 

5. What are the obligations of the employer? If he fails, what 

is the consequence? 

6. What circumstances would justify discharge and forfeiture of 

wages due? 

7. May employees be fined for coming late? 



m 



CHAPTER XLII 

EMPLOYER'S RESPONSIBILITY 

§ 375. Introductory 

^ Under the common law, the employer's responsibility for 
injuries to his employees was reduced to a minimum. 

I. "The rule as to the assumption of risk" held that if 
the defects of equipment were such that the employee could 
see them, he assumed all the risk by taking employment. As 
a man who needed work was not in a position to reject it 
because equipment was unsafe, the doctrine prevented a multi- 
tude of injured workmen from receiving damages. (See 
§276.)^ 

2. "The rule as to contributory negligence" relieved the 
employer from any responsibility if the workman had himself 
been in any way careless. Many a crippled worker was de- 
feated in the courts by reason of this rule. (See § 27^,) 

3. "The rule as to fellow-servants" was a particularly 
unjust regulation. If the carelessness or negligence of a fel- 
low workman caused the injur>', the hurt man had no com- 
pensation. He did not hire the men with whom he worked, 
but the law held that if he chose to work with them, and 
they were careless or incompetent, the employer who had hired 
them was relieved of all responsibility. (See § 278.) 

The injustice of these rules and the disadvantage to the 
injured workman when he tried to enforce his rights in the 
courts, have led to the passage of many laws designed to 
remedy the conditions. There are two classes of these laws: 

1. The employers' liability laws, which aim to define the 



EMPLOYER S RESPONSIBILITY 



325 



2. 



employers* liability and to modify or remove the 
objectionable common law rules. 
The workmen's compensation laws, which try to sys- 
tematize the responsibility for injury and to provide 
something in the nature of insurance for the 
wounded and bereaved in the fields of industry. 
These laws proceed on the theory that if a workman is 
injured from any cause, there is a loss that someone must 
stand. In such a case, it seems that the particular industry 
should care for those who were injured in it, and that the 
care for the injured should be made part of the expenses of 
the business, so that careless and conscienceless employers 
would not be allowed to shirk responsibility. 

§ 276. Doctrine of Assumption of Risk 

This rule of law still holds in many states where there is 
no workmen's compensation act, or where the workmen's 
compensation act does not cover all kinds of employment. 

The doctrine holds that if there are dangers in the busi- 
ness which are sufficiently obvious for the employee to notice 
and recognize, he assumes the risk of accidents which may 
arise from them, and the employer is not liable for his injuries. 
The same would be true if the workman afterwards discovered 
dangers and remained in the employment without the em- 
ployer's promising to remedy them. 

If the employer assures an employee that his work in- 
volves no danger, the latter cannot be held to have assumed 
the risk. For instance, in Wurtemberger v. Metropolitan St. 
R. Co., a foreman laughed at a workman when he told him 
that a jack was unsafe, and said to the rest, "Here is a green- 
horn, and he thinks that jack is unsafe." ^ Wurtemberger was 
held to have a right to damages for the injury subsequently 
received. (See also §§ 279, 280.) 

* 68 Kansas 642. 



Ii 
I 






t> 



'm 



326 



EMPLOYMENT 



employer's responsibility 



327 



§ 377. Doctrine of Contributory Negligence 

This rule holds that if the carelessness of the injured em- 
ployee in any way contributed to the accident which caused 
the injury, the employer will not be held responsible. 

It makes no difference that the carelessness of the employee 
was unintentional or the result of a mistake. For instance, 
in one case, an employee thought he was walking on a side 
track instead of the main track and continued walking along 
it until a train struck him.* He was not permitted to recover 
damages. 

In another case, a brakeman named Quirouet left the 
brakes set on a freight car. Then, instead of waiting for the 
caboose which had steps on it, he tried to climb up and 
turn off the brakes so as to prevent the wheels from bursting 
and wrecking the train. He was injured while attempting to 
climb up in this way, and was not permitted to recover 
damages.' 

Some states now have a doctrine of comparative neg- 
ligence. Sometimes the accident was primarily due to the 
carelessness of the employer or to his neglect to perform the 
duties which he owed to the employee, but the employee's own 
carelessness had something to do with it. In this case the 
jury must determine what damages are due the employee for 
the injury, and then decide what relation his carelessness bore 
to the employer's carelessness or neglect of duty, and award 
him a proportionate amount of the damages. (See also 
§§ 279, 280.) 

§ 278. The FcUow-Scrvant Rule 

The fellow-servant rule means that the employee cannot 
hold his employer for damages if the injury was due to the 
act of a fdlow-servant or a fellow employee. This rule, with 



"Vreeland ▼. Chicago, etc., R. Co.. 92 Iowa 279: 60 N. W. ka2. 
* Quirouet ▼. Ala. Great Southern R. Co., in Ga. 315; 36 S. E. 



S99. 



the doctrines of assumption of risk and contributory negli- 
gence, is rapidly being done away with. 

In some states the harshness of the old law has been miti- 
gated by the so-called superior servant rule. That is, if 
the fellow-employee was a superintendent or someone in a 
position of authority, he is not regarded as a fellow-servant 
and the employer is responsible for his carelessness. In some 
states, only an employee who has the power to hire and dis- 
charge is regarded as being a superior servant ; while in others, 
any position of authority which gives him the power to con- 
trol the actions of the men is sufficient to insure his status 
under the superior servant rule. (See also §§ 279, 280.) 

§ 279. Employers* Liability Acts 

Employers' liability acts have been passed to define and 
increase the liability of the employer for injuries. Most of 
them do away with, or at least modify, some of the old rules 
excusing the employer from liability. The doctrine of the 
assumption of risk has generally been greatly modified, and 
the duties of the employer to guard against accident have 
been increased. In New York, for instance, the employee 
assumes only such risks as may still remain after the employer 
has taken care to discover and remedy all defects, and has 
complied with all laws requiring safety devices. 

It is under these acts that the doctrine of comparative 
negligence has been introduced. 

Differences in Liability Acts. In order to know just what 
the effect on the old rules is, it is necessary to consult the 
particular liability act of each state, as the acts differ some- 
what. Some of the acts apply only to special classes of work- 
men, such as miners; while others exclude certain classes, 
such as farm laborers. For information in regard to this 
also, it will be necessary to consult the particular act in 
question. 



328 



EMPLOYMENT 



employer's responsibility 



329 



As a usual rule, these acts provide that the employees of 
a subcontractor are to be considered as the employees of the 
contractor also, for the purpose of claiming compfensation for 
injuries under the act. (See §§ 259, 260.) 

Notice of Accident— Time Limits. In order to obtain the 
benefits of bringing suit under the act, the employee must 
give his employer a notice— usually it must be written— of 
the time, place, and cause of the accident The employee may 
either serve the notice personally or send it by mail to the 
employer's last known address. This notice must be given 
within a certain limited time after the happening of the acci- 
dent. The time varies in the different acts, and there is 
generally some provision allowing the employed a certain ex- 
tension of time in case of mental or physical incapacity, so 
that he may send the notice after the incapacity has been 
removed. The action must be brought within a certain time 
from the happening of the accident, generally varying from 
one to two years. 

Death of Employee-^ ame of Action. In case of the 
employee's death from his injuries, these laws give a cause 
of action to his personal representative, i.e., executor or ad- 
ministrator, or to his surviving relatives, to recover damages 
for the injury these relatives have suffered by his death. In 
such a case, the executor or administrator is allowed a certain 
period of time after his appointment in which to give to the 
employer the notice mentioned above. 

_____ • 

This right of action in case of death is distinct from the 
right of the employee to sue for injuries. The employee may 
recover damages for his injuries ; his representatives may re- 
cover only damages caused to them by his death. But, as a 
sort of additional penalty to the employer, the state of Massa- 
chusetts allows the surviving relatives to recover damages 
for conscious suffering enduring by the employee before his 
Qeatii. 



In order to take advantage of these acts, the rules as to 
the notice and the time within which the action may be brought 
must be strictly observed. If, through failure to comply with 
them, the new right of action under the act is lost, the em- 
ployee still has his old action at common law for the injury 
which he has suffered, provided that it has not become out- 
lawed also by lapse of time; the employee would, of course, 
stand a much better chance of recovering if he sued under 
the act. His relatives in case of his death have only the action 
given them by the statute. If they fail to take advantage of 
this action, their remedy is gone. 

Some of these acts have been superseded by the workmen's 
compensation act discussed in the next section. In other states, 
as in New York, the workmen's compensation act applies only 
to certain employments, leaving the rest to come under the 
employers' liability act. 

The Federal Employers' Liability Act. This act applies to 
all the railroads engaged in the business of interstate com- 
merce throughout the country. It also applies to all railroads 
in the possession of the United States, such as those of the 
Philippines and Porto Rico, and in the District of Columbia. 
Where the railroads are engaged in both interstate and intra- 
state commerce (that is, both commerce which crosses the 
state lines and that which is carried on wholly within the 
state), in order to take advantage of the law's provisions 
the employee must, of course, himself have been assisting 
in the business of interstate commerce at the time the accident 

occurred. 

However, a railroad company in contributing to an em- 
ployees' accident fund may lawfully make the condition that 
if the employee accepts any benefit under the fund, he thereby 
gives up his right to bring suit. He does not make his choice 
as to whether he will accept the benefit or will bring suit, until 
after the injury has taken place. 



ii 






1 



330 



EMPLOYMENT 



Notes: 
I. In attempting to claim damages under any em- 
ployers' liability act. if it is proposed to bring an 
acUon. consult a reputable lawyer, who will be 
able to attend to aU the necessary formalities and 
to secure for the injured employee his proper 
rights whether by suit or by compromise of the 
claim. 

2. If you intend to sue, do not accept any benefits 
from msurance funds connected with the com- 
pany without first consulting a lawyer. 

§ 280. Workmen's Compensation Acts 

With all the protections and safeguards that can be devised 
by saence and required by law to protect the employee, there 
will always be certain occupations which in their verv nature 
are dangerous to life and limb. Such are mining, building 
railroading, working in atmospheres clouded by fine dust or 
gas fumes, etc. In the past, the loss of life and health in these 
industnes reached alarming proportions. It has been reduced 
somewhat by the modem tendency to require safeguards, but 
the fact remains that these industries are all the time "scran 
pmg" humanity. ^ 

Since employees injured in these occupations seldom earn 
wages large enough to permit them to provide for the future 
the burden of taking care of them and of their dependents 
has fallen m a large measure on the community. It seemed 
more just to make the industries which caused the injuries 
pay the expenses than to let the burden faU on the employee 
or on the community as a whole. 

In consequence, both here and abroad there has grown 
up m recent years a system known as workmen's compensa- 
lion* 



employer's responsibility 



331 



It is part of good bookkeeping to carry a depreciation 
account to cover the wear and tear on mechanical machinery 
in a manufacturing business as a part of the cost of the 
product. The time has come when provision must be made 
for the wear and tear on the human machinery engaged in 
the industry which is quite as much a part of the cost of 
production as is the wear and tear on the plant. We are 
accordingly getting Workmen's Compensation Laws to pro- 
tect the laborer to a slight extent against accident and to 
provide for his family in case of death in the course of his 
employment.* 

The essential feature of this system is that there is estab- 
lished a scale of compensation for different kinds of injuries, 
by which payments are usually made at regular intervals ex- 
tending over some period of time. The payment must be 
made, as a general rule, regardless of who was to blame for 
the accident, except where the employee wilfully and inten- 
tionally brought the injury on himself, or where it came about 
as the direct result of his intoxication. 

§281. Modern Statutory Law 

In New York State, the compensation law' enumerates 
some forty groups of hazardous employments. The scope of 
the law is widened by including, as the last group: 

All other employments not hereinbefore enumerated car- 
ried on by any person, firm or corporation in which there 
are engaged or employed four or more workmen or opera- 
tives regularly, in the same business or in or about the 
same establishment, either upon the premises or at the plant 
or away from the plant of the employer, under any contract 
of hire, express or implied, oral or written, except farm 
laborers and domestic servants. 

In addition, it is provided that any employer not coming 
under the provisions of the law, or having some employees 
who do not, may choose to accept the law of his own accord. 

* Samuel Untermeycr. 

•As in effect July i, i9>9. 



*i| 



f 



332 



EMPLOYMENT 



In other states, it applies to all occupations, or to all occu- 
pations with a few exceptions, such as farming or domestic 
service. In New Jersey the act applies to aU classes of em- 
ployees, including farm hands and domestic servants. 

The injury must be one arising out of the employment. 
For instance, in a New Jersey case a workman named Hully 
slipped on a concrete floor while dodging away from a fellow- 
workman who was trying to knock his hat off. This was hdd 
not to come under the compensation act. 

If the employee is injured on his way to or from work, 
while on his employer's premises, it is considered injury iii 
the course of his employment and entitles him to compensation. 
An injury received while he was disobeying orders would 
not entitle him to compensation. A man named Reimers who 
had been forbidden by his employer to make use of an auto- 
mobile, took it out and was injured in consequence. He was 
not allowed compensation.* 

An injury caused by a third person to an employee in the 
regular course of his work entitles him to compensation from 
his employer as does any other injury in the course of the 
employment. For instance, in one case a superintendent was 
shot by a man who had been annoying a woman employee and 
whom he had ordered off the premises. The superintendent 
was entitled to compensation. 

§282. Schedules of Compensation 

Each act contains its own schedule of compensation. Most 
of them follow the same general scheme. The following is 
the New York schedule of compensation for injuries : 

1. Permanent total disability shall entitle the employee 

to receive two-thirds of his weekly wage, while he 
lives. 

2. Temporary total disability shall entitle the employee 

• Reimen ▼. Proctor Pub. Co., 85 N. J. L. 441. 



EMPLOYER'S RESPONSIBILITY 



333 



to receive two-thirds of his weekly wage to an 

amount not exceeding $3,500. 
3. Permanent partial disability entitles the employee to 

receive two-thirds of his weekly wage for varying 

periods ranging from 60 weeks for loss of thumb 

to 312 weeks for loss of an arm. 
In the case of death, compensation to the employee's de- 
pendent relatives is provided according to a fixed schedule. 
In New Jersey the scale runs as follows: For one dependent 
35 per cent of wages earned until remarriage of widow or 
attainment of age of 18 by child. From this it increases by 
a sliding scale to a payment of 60 per cent of wages earned 
in case of six dependents. In any case, payments are not to 
exceed 300 weeks. 

In New York the death compensation ranges from 30 to 
661 per cent of wages as a maximum, and weekly pay- 
ments are to continue until dependency ceases. In other states 
there are other variations, but enough has been cited to give 
a general idea of the liberality of these laws. 

§ 283. Who Are Entitled to Compensation 

It is generally held that in order to be an employee entitled 
to compensation the man must be regularly employed, and 
must be subject to the employer's orders as to how the work 
shall be done. Independent contractors and subcontractors 
are not employees. But the employees of subcontractors may 
recover compensation from the main contractor as though they 
were his employees. (See §§ 259, 260.) 

Where Uiere is a dispute between the employer and the 
employee over the amount of compensation which is due under 
the act, most of these acts provide for arbitration. Some of 
the acts provide that at any time an employer may agree with 
his employees to appoint a standing arbitration committee 
which shall decide all disputes that may arise in the future. 



I 



wv'W 



EMPLOYMENT 



The law usually requires the employer to report all acci- 
dents to the Compensation G)mmission within a certain time 
after their occurrence, on penalty of paying a severe fine if he 
fails to comply. 

Where one injury results from another, the first one being 
the result of the accident, the compensation must cover both. 
For instance, an employee was paralyzed in an accident and 
died of blood-poisoning from a bed-sore which came because 
he had to lie in one position all the time. His relatives were 
allowed compensation for his death/ 

If the employee was not strong physically, a fact which 
rendered him more prone to accident, it would make no dif- 
ference in his right to compensation for the injury. In a 
Massachusetts case, a delicate woman named Honora Madden, 
who was employed as a carpet sewer, brought on angina pec- 
toris by pulling heavy carpets across the table in the course of 
her work. It was admitted that if she had been stronger the 
exertion would not have hurt her. She was allowed full com- 
pensation.' 

§ 284. Employer's Defenses Taken Away by the New Act 

This scheme of compensation is not made compulsory, but 
the same effect is accomplished by taking away all of the 
defenses, i.e, assumption of risk (§ 276), contributory neg- 
ligence (§ 277), and the fellow-servant rule (§278), which 
the employer had at common law. The result is that the em- 
ployer's chances of escaping the payment of heavy damages 
in a suit at law are so slight that most employers prefer to 
take advantage of the act. 

The employer comes into the scheme by taking out in- 
surance, or giving security for the payment of claims required 
by the act. After he has done this, it is assumed that each 

'Burn's Case. 218 Mass. 8. 
*Madden's Case, 2a Mass. 487 



employer's responsibility 



335 



of his employees has also consented to come under the scheme 
unless the employee at the time he enters the employment 
files notice to the contrary with the employer. In New Jersey, 
every agreement of employment is deemed to have been made 
under the act, unless at the time of making the contract one 
of the parties notifies the other in writing that he refuses to 
accept the agreement under the terms of the act. 

Employees Cannot Give Up Right, The acts also provide 
that the employee cannot make an agreement giving up his 
right to compensation. If he makes one, it will have no bind- 
ing effect on him, and he may claim the compensation just 
the same. 

Notes: 

I. Every employer of labor should inform himself as 
to his responsibility under the laws of his state. 

2« It is cheaper for the employer to enter the compen- 
sation scheme than to take the alternative. Where 
the acts allow it, most employers will find it 
cheaper to insure with the State Fund or some 
good insurance company than to risk paying for 
injuries. 

3. An employer should select reputable physicians and 
notify his employees to go to them, when the act 
makes him responsible for medical attendance. 
This will protect both himself and his employees 
against overcharge or malpractice. 

§ 285. Third Persons 

Except under the workmen's compensation acts, the em- 
ployer is not responsible to his employees for the acts of third 
persons over whom he had no control. If a train robber were 
to hold up a train and shoot the engineer, the railroad com- 
pany would not be responsible for the affair to either em- 
ployees who were hurt or passengers who were robbed. 



336 



EMPLOYMENT 



The employer is, on the other hand, responsible to third 
persons for any injuries caused to them by his employees in 
performing their duties. If the injury is the result of some 
act of the employee which has no connection with his duties 
as an employee, the employer is not liable. If, for example, 
the employee should injure the third person in a fight over 
some personal quarrel, or in playing a practical joke, the em- 
ployer could not be held to have had any connection with the 
matter. (See § 136.) 

Where an employer is liable to a third person for injuries 
caused by his employees, if the third person was careless in 
any way that contributed to the accident, he would be pre- 
vented from recovering damages from the employer. The 
contributory negligence rule (§ 277) still stands in all cases 
so far as third persons are concerned. 



Review Questions 



1. 



What three common law rules relieved the employee of respon- 
sibility for accidents? Explain the working of each. 

2. What two classes of modem law modify the injustice of the 

common law rules as to accidents to workers? What is the 
theory of these modern laws? 

3. What are the special features of the workmen's compensation 

act of your own state? 

4. What are the special features of the employers' liability act of 

your own state? 

5. Who are employees ? Who are entitled to damages or compensa- 

tion for an injury? What must the injured workman prove 
to secure damages for a personal injury in your state? 
What should a workman, injured while employed by one not 
insured under workmen's compensation act, do in your state? 

7. When is an employer responsible to third persons for injuries 

caused by his employees? 

8. If a woman offers her neighbor's cook higher wages so that she 

leaves, is she liable to her neighbor in damages? 



6. 



PART VIII 
PARTNERSHIP 



..( 



CHAPTER XLIII 



INTRODUCTORY 



§ 286. Definition 

Partnership is the result of a contract between two or 
more competent parties to combine their money, property, 
skill, or labor for the transaction of some lawful business for 
profit. 

Essential Elements, Mere representation that parties are 
partners, or their passive acquiescence in such representations 
by others, will, as to third parties, be sufficient to establish 
partnership liabilities. To form a partnership as between the 
parties themselves is less simple and requires the following 
essential elements: 



I. 
2. 

3. 

5. 
6. 



An agreement 

Parties competent to contract 
Partnership capital or property 
A community of control 
A lawful business 
Profit-sharing as a motive 

Unless expressly stipulated otherwise, as in the case of 
dormant and special partners, each member of a partnership 
has an equal right to assist in the management of the partner- 
ship business and property, and has equal power to contract 
regarding it. This right may be restricted by agreement 
among the partners. 

The business or undertaking must be lawful, and the 
association must have been formed for the purpose of sharing 
profits. An association that does not share profits is not a 
partnership. 



339 



340 



PARTNERSHIP 



I 



DisHncHve Features. The partnership relation is char- 
acterized by certain distinctive features. 

1. Each partner is an agent for the others in the trans- 

action of any business within the scope of the part- 
nership purposes. 

2. Each partner shares, either equally or in an agreed 

proportion, in the net profits of the business and 
usually in the losses also. 

3. In case of insolvency each partner is personally liable 

for all of the firm's obligations. 

4. The property, the business, firm name, good-will, and 

any trade-marks or other intangible possessions are 
firm property and form part of the common fund. 

5. A partner is entitled to good faith and fair dealing 

from his associates, and on dissolution of the part- 
nership may have an accounting to ascertain his 
interests in the business. 

6. The partnership relation is a purely personal one and 

the partnership is terminated if any one of the 
partners dies, retires, or sells his interest in the firm. 

7. Unlike a corporation, the partnership has no entity 

distinct from its membership. It cannot sue nor be 
sued in the firm name. It cannot contract with nor 
bring suit against its members, nor can they bring 
suit against it. 

§287. Partnerships Distinguished from Non-Partnership 
Organizations 

0>-ownership in either land or personal property does not 
involve any partnership between the owners. 

Associations not formed for profit are not partnerships. The 
many unincorporated clubs, churches, societies, associations, 
and fraternal organizations are not partnerships and do not 



INTRODUCTORY 



341 



involve mutual agency nor partnership liability. Co-operative 
societies which buy goods and distribute them among their 
members are not partnerships unless formed for the purpose 
of making a profit. In some states business organizations 
designated as partnership associations are authorized by law. 
These are neither partnerships nor corporations, though they 
partake of the characteristics of both. (See § 293.) 

Contracts That Are Not Partnership Contracts. Contracts 
are frequently made for a share of profits as compensation 
for services, for the iiqp of prnp^rf y, or for the loan of money . 
In the first two cases, if the agreement was made in good faith 
and not to evade the law, the contract will not be held to create 
a partnership. Where money is loaned, and an agreement is 
made in good faith to give the lender a share in the profits; a<; 
compensation tor its use, and he does not participate in the 
management ot the business or hol<i himgplf r>iif oc o partner^ 
tne contract will not in most states be considered one of part- 
nership. It is sater 10 nave tne agreement expressed in writ- 
111^, as under the old rule of law the parties became partners 
under such an arrangement, and in some states it is necessary 
to have a written agreement to prevent this eflPect. 

A contract of the above natnrP ^hoiiM prn vidp for iht^ re- 
turn of the money loaned without ref erence to profits. VVher^ 
s uch a contract concerns t he use ot propert y. TIT? title to the 
property should be carefully reserved to the owner. I n all 

Casei:; where profits nre rr^l^Pn withniif parfn^rt^^j p intent Tt i<; ^ 

prudent to specify in the contract that the party shall rerejy p 
a s compensation *'an amount equal to'' the propoc/^ri cV.nt... ^f^ 
profits. 

If in any of the cases of profit-sharing discussed, the agree- 
ment is made for a share of the " gross returns,*' this wordini 
shows conclusively that ^he arrang-pm^t^^ U n^^ a partnership . 
The usual arrangement for renting land for a share of the 
crops raised is an example of this form of contract, and 



I . 



342 



PARTNERSHIP 



neither as between the parties themselves nor as to third per- 
sons would the relation be one of partnership. 

Liability ta Third Parties. In dealing with this question 
it is to be emphasized that as to third parties it is the apparent 
intention of the parties rather than their expressed or declared 
intention which controls. If the acts of the persons under con- 
sideration are such as to mislead third persons into believing 
them partners, they will have to assume the liabilities of part- 
ners to such third parties. As between the parties to the 
agreement, however, the true rule is that "the agreement and 
intention of the parties themselves should govern in all cases." 
(See §§ 295, 299.) 

Notes: 

I. A contract for a share in the profits not intended to 
create a partnership should always be ifl vviiliif g 
and provid e either for "an amount equal to" the 
agreed share of the profits, or for a share of the 
".tfiV&^ ^^lUUIh." rthll »ii/l fnr "a sharp in rhp . 
profits." 

with whom tht^ profits are to he f;hared is not tabe 
ajiartner, and is to have no control of the business 
Dor liability for its debty 



2. 



Review Questions 

What is a partnership? What are the essential elements? 
What may cause a person to be held liable as a partner by third 

parties? 
How is a partner an agent? 
Must each partner have an interest in both profits and losses? 

5. What is meant by partnership liability? 

6. Distinguish between the legal character of a partnership and a 

corporation. 



I. 
2. 

3- 
4 



INTRODUCTORY 



343 



la 

II. 
12. 

13. 



7. Distinguish between partners in general business and partners 

in common of a tract of land. 

8. How may clubs, associations and the like be distinguished from 

partnerships ? 

9. Can a person have a share of profits as compensation for services 
or use of property without becoming liable as a partner? 

Why does a different legal effect attach to a share of "gross 
returns" and a share of "net profits"? 

What determines the liability to third parties? 

If a man is interested in the profits of a business, is he neces- 
sarily a partner therein? Explain answer. 

A and B were partners. C was a salesman for the firm, and 
for his services he was paid one-tenth of the net profits of 
the firm. The firm owed D $1,000 on an open account, and 
D sued A, B, and C as partners. Is C liable as a partner 
or not? Why? 

14. The president of a non-incorporated club buys some furniture 

for the club. Will the members be liable for the cost of the 
furniture? Why? Will any of the members be liable? 

15. A v/as a horse-trainer and B the owner of a race-horse. They 

made an agreement whereby A was to keep, train, and ccntroi 
the horse, and both A and B were to divide the expenses and 
the winnings. Was this a partnership arrangement? 

16. A makes a loan to the firm of X, Y & Co., who agree to pay 

him a certain percentage of the profits. Does this arrange- 
ment constitute A a partner of the firm? 

17. A and B make an agreement whereby A agrees to run B's 

factory and B agrees to pay A a certain percentage of the 
profits. Is this a partnership arrangement? 

18. B and L make an agreement whereby B furnishes a farm, team, 

and some labor, and L furnishes the greater part of the labor 
and agrees to manage the farm. The profits are to be divided 
as follows: two-thirds to B and one-third to L. Is this a 
partnership agreement? 



1 



CHAPTER XLIV 

THE CONTRACT OF PARTNERSHIP^ 

§ a88. Parties 

As partnership is strictly a contract relation, it is essential 
that the parties to it be competent to contract. (See under 

§ 38.) 

H a minor becomes a partner, his acts will bind the firm, 

since a minor may act as agent. Should the firm become in- 
solvent, however, the minor may take advantage o£ his in- 
fancy, refuse the partnership liability, and leave his associates 
to bear the entire burden of the partnership obligations, in- 
cluding those which he himself created, but he cannot with- 
draw any capital he may have invested in the firm. 

A partnership may be entered into between two firms al- 
ready existing, or between a firm and an individual, as readily 
as may any other contract. Under such an arrangement the 
profits, and in case of dissolution the assets, are divided among 
the component firms or parties, and then subdivided by the 
firms among their individual members. The individual mem- 
bers of both firms are personally liable to third parties. 

A corporation cannot become a partner unless expressly 
authorized to do so by its charter. It may, however, make 
itself liable to third persons as a partner if it attempts to enter 
into partnership relations. 

Note: 

I. Any person who is capable of contracting may be- 
come a partner. Corporations, before they may 



» For formt of partnership contract, see Chapter CV, Forms 50, 52. 

344 



THE CONTRACT OF PARTNERSHIP 



345 



become partners, must be expressly authorized by 
their charters to do so. 

§ 289. Kinds of Partners 

Partners are of various kinds. There may be general, 
limited, dormant, and nominal partners. 

General Partners, A general or active partner is one who 
takes part in the management of the business, and who is 
liable for the firm's obligations without limitation as to 
amount. An active partner who wishes to withdraw from the 
firm and cut off subsequent liability, must give notice to all 
those with whom the firm is doing business. 

Limited Partners. A limited or special partner is one who 
does not participate to the full in partnership liability. As 
the price of his limited liability, such a partner must refrain 
from taking any part in the management. Limited partner- 
ships are formed only where authorized by special statutes. 

(See § 293) 

Dormant Partners, A dormant or sleeping partner is one 
who has invested as a partner but whose connection with the 
firm is secret and who has no part in the management of the 
business. A dormant partner has no exemptions or privileges 
beyond those of a general partner, except as a result of the 
secrecy. If this connection with the firm is discovered he is 
liable in exactly the same way and to the same extent as any 
general or active partner. Unless prevented by the partner- 
ship agreement, he may at any time assert himself as an active 
partner and take part in managing the firm business. 

A dormant partner who withdraws without giving notice 
cannot be held to any subsequent liability of the firm, even 
though his previous connection with it should become known. 
His withdrawal, however, does not free him from liability for 
anything done by the firm during his connection with it. 

Silent Partners. The term "silent partner" is often used 



346 



PARTNERSHIP 



I 
I 



with much the same meaning as "doiroant partner." There is, 
however, this difference: a dormant partner must be both 
"secret" and "silent," while a silent partner need not be secret. 
A silent partner has no voice in the management of the firm 
business, but may be publicly known as a partner. He is liable 
for firm obligations just as is any other partner, and if he with- 
draws, he must give notice to escape subsequent liability. 

Nominal Partners. A nominal partner is one who, while 
not really a partner, in that he has no interest in the business 
or profits, allows his name to be used or to appear as that of a 
partner. He is held liable to those who give credit to the firm 
on the faith or with knowledge of his being a member. He is 
not, however, liable to a creditor who had no knowledge of his 
being held out as a partner when the credit was given. 

Suhpartners. A partner may agree with an outside party 
to share his interest in the profits and property of the firm. 
Such an arrangement is termed a subpartnership. It may be 
entered into without the consent of the firm, and without 
affecting in any way its existence or operations. The sub- 
partner is not a member of the original firm, is not liable to 
its creditors, and, under ordinary circumstances, has no right 
of accounting against it. 

Notes: 

I. Limited partners should always take care to see that 

the proper notices and other regulations required 

by the law of their state have been given and 

complied with. 
A retiring partner should take care to see that all 

those with whom the firm has had dealings are 

notified of his ceasing to be a member of the firm. 
A nominal partner is liable only if he permitted his 

name to be used. One cannot be made a nominal 

partner against one's will. 






THE CONTRACT OF PARTNERSHIP 



347 



. 



§290. Partnership Contracts 

The customary and the only proper method of forming a 
partnership is by written articles of partnership signed by all 
the parties. These articles may be a very simple memorandum 
of agreem.ent, or they may be expanded into elaborate articles 
of association, providing for the numerous details and possible 
exigencies of an extended commercial enterprise. 

In spite of the dangers of such a course, partnerships are 
frequently formed by oral agreement. Under the Statute of 
Frauds, an oral contract of partnership to last more than a 
year is not valid. If, however, immediately upon making 
such a contract, the parties thereto enter upon its performance, 
a partnership at will is thereby formed, which is legal and is 
governed as to its terms by the contract, but which may be 
terminated at any time by either party, regardless of the terms 
of the contract. 

It must be borne in mind that the Statute of Frauds does 
not apply to oral contracts that may be performed within a 
year. Such contracts are binding for the specified length of 
time, and cannot be dissolved at will without incurring a 
liability for damages. 

In many cases of partnership there is neither a written nor 
a verbal contract which can be proved, but the parties con- 
cerned, either intentionally or unintentionally, have acted as 
partners, have had a common fund in which they exercised a 
community of interest, and have shared profits and losses. 
Under such circumstances they will be held to be partners, 
both as between themselves and as to third persons. 

This same principle applies to the case of parties who as- 
sume to be incorporated when they are not. It does not apply 
to those who have attempted to incorporate legally, but have 
failed in some point of procedure; they would be held to be 
a de facto corporation and as such capable of doing business. 
Laws Regulating Formation of Partnerships. Most part- 



348 



PARTNERSHIP 



nerships are formed under common law rules that are the same 
in every part of the Union. In certain of the western states, 
however, codes of partnership law, intended to regulate gen- 
eral partnerships, have been enacted. Entirely apart from 
these general partnership codes, nearly all the states have 
provided for the organization of partnerships with special or 
limited partners. The Uniform Partnership Act, prepared and 
recommended by the National Conference of Commissioners 
on Uniform State Laws, has been adopted in Maryland, Penn- 
sylvania, Wisconsin, Illinois, Michigan, Wyoming and Ten- 
nessee. 



Notes: 



I. 



2* 



The contract of partnership should always be in 
writing. 

The state partnership law should always be consulted 
in the formation of any partnership, and especially 
in the case of a limited partnership. 



§ 391. The Firm Name 

The usual practice where there are two partners is to use 
both names; the name of the leading partner naturally coming 
first. If there are more than two partners, all the names may 
appear, though this is luiusual in mercantile partnerships. 
Usually but one or two names appear, the other names being 
represented by the addition, "& Co." Professional partner- 
ships on occasion use three and even more names in the firm 
title. 

In the absence of statutory restriction any title that is 
preferred may be used as a firm name, even though it contains 
no pjirtner's name, for instance, such a name as "The Ansonia 
Furniture Company." In New York and some other states a 
firm using any name other than the names of the partners or 
some of them, must register such "trade-name," together with 



THE CONTRACT OF PARTNERSHIP 



349 



the real names of the partners, in the county clerk's office, 
under legal penalty. It is also illegal in New York to use 
the suffix "& Co." unless it represents existing or former 
partners. Partners may change the firm name without dis- 
solution or any special formality, or may have more than one 
name for the firm. 

All business of the firm should be done under the firm 
name, although a partnership may exist and be bound without 
any specific firm name by using the separate names of the 
partners. The firm signature, as "Herrick, Simpson & Co.," 
may be written by a partner or by any agent of the firm. If 
suit is to be brought the names of all the partners must appear 
in the pleadings. The usual form is "Anselm Cole, Harvey 
Andrews and James Ellis Jones, partners under the firm name 
of Cole & Co." 



§292. Partnership a Personal Relation 

It must be remembered that partnership is a personal rela- 
tion. Such skill and experience as one partner may possess 
above the others constitute as legitimate a form of investment 
as any other kind of capital. In many cases these are taken 
as the full equivalent of the financial investments of other 
members of the firm. In others, they are regarded as a partial 
equivalent, and in still others extra abilities are recognized by 
a special salary or a larger percentage of profits. 

As partnership is a personal relation and as one reckless 
partner may bankrupt his associates, the selection of partners 
is a vital matter. No one can be forced to accept a partner 
he does not like. So a new partner may not be admitted except 
with the unanimous consent of the entire firm. 

Because of the importance of the personnel, the death of 
one partner will ordinarily dissolve the firm. 



3SO 



PARTNERSHIP 



Note: 



I. 



Partnership is a personal relation and a partner 
should always be a man who can be trusted. 



§ 293. Classification of Partnerships 

Partnerships may be roughly divided into two classes, 
general and special. While this classification covers the ma- 
jority of cases, there are a few forms involving peculiarities 
of partnership law, such as limited partnerships and joint-stock 
companies, which require separate discussion. 

A general partnership is the usual partnership formed for 
the continued prosecution of some general line of business. 
It is the commonest form of partnership. General partner- 
ships may be either trading or non-trading. 

Trading partnerships include all those formed for the pur- 
pose of buying, selling, and manufacturing. 

Non-trading partnerships do not buy, sell, or manufacture 
as a principal feature of their business. These partnerships in- 
clude professional partnerships, firms of brokers, etc. 

A special partnership is formed for the transaction of some 
single piece of business, or for the conduct of some one line 
of business. Examples of special partnerships are as follows : 
a partnership to buy and sell some definite piece of land, to 
ship a cargo to some particular place, to buy and operate a 
threshing machine, to finance and sell a particular patent, or 
to deal in specified stocks. A common form in the present 
day is the syndicate organized for the promotion or financing . 
of some large corporate enterprise. Special partnerships arev 
often termed "joint ventures." It is to be noted that a special 
partnership means one undertaken for a special business, while 
a special partner simply means a limited partner. 

A limited partnership may be formed only under special 
statutes. It differs from the ordinary partnership in that cer- 
tain of its partners are silent, or inactive, and the liability of 



THE CONTRACT OF PARTNERSHIP 



351 



these partners is limited to the amount actually invested by 
them. These partners are called special partners. If a partner 
whose liability is thus limited takes active part in the conduct 
of the partnership business, his status changes and he at once 
becomes liable as a general partner. 

The restricted liability enjoyed by the special partner can 
be secured only by strict compliance with the statutory direc- 
tions. These usually prescribe notice to the public of the 
formation and nature of the partnership and require that a 
certificate and affidavit of the limitations of the partnership be 
filed in some office of public registry. In New York a limited 
partner must contribute his capital in cash. In all cases the 
local statutes should be examined, and their directions fol- 
lowed implicitly. In a New York case a limited partner was 
held by the courts to be in fact liable as a general partner 
merely because the affidavit — stating that cash had been paid 
by the limited partner — was filed at a time when he had in 
fact given only a check dated a few days in advance. 

A joint-stock company is a form of business organization 
formerly popular but now practically obsolete. It is not or- 
ganized under any statute, and, though usually adopting a 
corporate name and having some of the features of a corpora- 
tion, is merely a copartnership, and the shareholders are re- 
sponsible for the debts of the company as in partnership. 

An important difference between such an organization and 
an ordinary partnership is that its members may transfer their 
interests exactly as stockholders do in a corporation. If there 
are many members, affairs are usually managed by a board of 
trustees or managers, and the individual members have no 
authority to act in the company affairs. 

In New York and some other states various forms of 
joint-stock companies, partnership associations, and other 
ambiguous organizations between partnerships and corpora- 
tions are authorized by statute. These statutes and the deci- 



352 



PARTNERSHIP 



sions of the state courts construing them must be consulted to 
ascertain their legal status. 



Review Questions 



1. 



3- 



What is the law as to a minor's becoming a partner? 

What is a general partner? A limited partner? A dormant 

partner? A nominal partner? A subpartner? 
What is a limited partnership? What does your own state law 

prescribe for the formation of a limited partnership? 

4. What is a partnership at will? 

5. In the event that the name of a partnership does not clearly 
indicate who all the principals of the firm are. what is neces- 
sary for such a firm to do in order to bring suit ? 

6. Why should a partnership agreement be written? How can 
parties drift into a partnership? 

7. What is a special partner? What is a special partnership? 

8. What are the peculiarities of a joint-stock company? 

9. What matters should be specified in articles of copartnership? 
Prepare a short form of partnership agreement for equal part- 
ners. 

Prepare a copartnership agreement that shall provide for a 
period of five years notwithstanding the death of one of the 
partners in the meantime, and provide also for payment of 
interest on investments, salaries to partners, and a method of 
determining and apportioning profits and losses. 

A buys the share of M in a partnership composed of M, N". and 
O. Does that make him a member of the firm? Explain 
answer. 

13. B withdraws by agreement from a firm of which he has been a 
member, but no announcement is made and he allows his name 
to be used on the letterhead. The firm becomes insolvent 
What is B*s position? 



10. 



II. 



12 



CHAPTER XLV 

PARTNERSHIP PROPERTY 

§294. Nature of Partnership Property 

The partnership investment is the money or property, 
tangible or intangible, contributed by the partners for the 
purposes of the business. The original property of a partner- 
ship is derived from the contributions of the partners. When 
profits are made, they may be drawn out, or they may be 
allowed to accumulate and meanwhile may be used in the 
prosecution of the firm's business. If retained in the business 
they are practically merged in the original capital, ,the two 
together constituting the partnership property. 

Any property purchased with partnership funds becomes 
prima facie partnership property. If such property is taken in 
the name of a single partner, he holds as trustee for the firm. 
The firm name, the good-will of the business, and any trade- 
marks used in the business are the property of the partnership, 
in which each partner has his interest. 

When the business is sold, the firm name passes with it. 
If the business is sold as a whole, the good-will passes with 
the firm name and the tangible assets. 

A firm as such cannot hold real estate. Hence, land must 
be deeded to the members of a firm to hold as tenants in 
common, or to some individual, who is usually a member of 
the firm, to hold as trustee for its benefit. A conveyance of 
real estate to a firm by name, in cases where the firm name 
contains the name or names of existing members, passes a 
legal title to the members named, who will hold in trust for 

353 



354 



fARTNERSmP 



Ae whole firm. If no member is named in the firm tide, no 

S toT /'rr'; '"' ^ ^"•^^ "^ '^''^ "^ ^^-p^'^ to 

aeed to the mdividnal members of the firm 

or tL^^"^'"'' 'T"^ '^ P^'^"^ P^°P^^- The mSey 
Zw^Tl 7""'"^ '" " partnership and any property ac- 
quired by aie firm is partnership property. Each partner may 
dea^ w.th .t in the firm business as an agent of L CZt 
he has no personal right to any of it. 

ev«f r"?" *^' "° '^'" *** ^*"*='* °" '^^ investment, nor 
even to mterest on money put in, over and above his agreed 

mvestaent. unless it has been expressly so agreed. It is alwa^ 

possiUe for a partner to advance money or to let the fim 

have the use of property of which he retains the right to 

^oTr" M '"'* ""^'^ °' P^P*^^ '«"^'"« h's individual 
property. Money or property, however, put into a partnership 

« a« ^n.esfn,ent becomes the actual property of tJe partZ 

Power Over Personal Property of Firm. Each partner's 
power over tl»e property of the firm is the same Each is 
agent for aH the others in everything that pertains to the car 
sale, and management of the partnership property 

witli^l'*""' ^'^ *;^ P°*^^ to ^y and seU personal property 
w^hm the scope of Ae partnership business, and the fi^l 
^und by h.s transactions. This power does not extend to the 
sale of proper^ used by the firm for carrying on the firm 
busmess, as such a sale would tend to destroy L partnerZ 
business. Where a sale is to be made of the stock b Sde 

fiL .,?'•' '^'' ^^ °' "^"^'^ «' f"™iture. all of Te 
firm should join in the assignment 

de J'rTeS' e.Z^'^^fuT ?"l P'^^^ ^^°°* "^^^ - valid 
deed to real estate held by the firm, but he can. when such 

contract is within the scope of the partnership bu .rsfmake 

a contract to convey, which the courts will compel the firL 



PARTNERSHIP PROPERTY 



355 



perform. Likewise, in a similar case, a partner can make a 
valid contract for the purchase of land by the firm. 

A partnership may be formed by either written or verbal 
contract for the express purpose of buying and selling real 
estate. In such cases the realty is treated for all partnership 
purposes as if it were personalty. 

For a legitimate purpose a partner has also the right to 
pledge or mortgage the real property of the firm. He has, 
however, no power to sell property of the firm or to borrow 
money upon it for his own purposes or to pay his own debts, 
and anyone lending him money, or buying property from him 
under such circumstances, with knowledge, takes no title to 
the property in question. 

The wife of a partner has no right to dower in real estate 
held for the purposes of the firm until all the claims of credit- 
ors and of all the other partners have been satisfied. In a 
solvent firm, however, the wives of the partners would be 
entitled to dower, and when such property is sold the wives 
should release their dower rights. 

Notes: 

1. A partner has a right to make use of firm property 

for the purposes of the business in common with 
all the other partners. 

2. He has no right to firm property personally until the 

firm has been wound up and the assets divided, 
unless he has loaned property with the express 
provision that it is to remain his individually. 

§ 295. Liability of Partnership Property for Debts 

A partner's interest can be reached by attachment or by 
execution. This interest, however, is merely a right to a cer- 
tain proportion of the surplus after debts are paid and the 
affairs of the partnership are adjusted, and this is all that can 



I 



IS6 



PARTNERSHIP 



S^rZS^.^ '"^ P'*^"''- "^^ «^ff«t of the sale of a 
Satr t T ""^" "^"*^°° *°"1«^ •'« to give the pur! 
Sor tV'^ V!: ""c"'^ *«= ^^« '"t^««t » vdue that "he 

of its affnJrc % partnership, and the immediate settlement 
anj^ingTs set aside LTfrltf ""'* "^ ""'^"^ '^''"' 
«„fi!l'^^°" following judgment on adLXSnsUhe firm 

ZJZ Pf'*"''"''"P P^P^rty. or on the individual property of 
Partner M T""'- " '* '^ ^^^«^ - '"<J-'dual propeTthe 

Se Xr J^'"" '"* rP^-^ '^'O"^ h^ recourse a^ns 
the other partners for their proportions of the debt. 

appKedTth? '"^"'^^"^ *^ partnership assets should be 
applied to the payment of the partnership debts and the 
eparate assets to the payment of the individual deb S Sd ^v 
surphis from either class should be carried over to the pal^nl 
of^^^e other dass. This process is caUed "Z^^i^^^l 

for wr^°° '^'"'* *' partnership there can be no claim 

ie e3tw°^ f r/"" °"' "^ *^ J°"* ^-^t^- This S 
oL^f ^' ^'.''J'^' "ot «PPly to New York and a few 
other states, m which tlie provisions of the exemption law 
extend to property owned by a partnership of whichTe debtoT 
was a member. (See § 300 ) » wnicn tlie debtor 

*Le SeA J f t*^" ^ "'''^' °"'y ^y ^ «^« Partners 
actmg together. If, however, one partner makes such an 

assigmnent. the others may, if they choose, ratify his action 

thus making Ae unauthorized assigmnent valid In c^L a 

partner has absconded, or cannot be reached, the rem35„^ 

^embers of the firm, acting together, may mak; a vaJd asSI^- 

It has. however, been held in New York that one partner 



PARTNERSHIP PROPERTY 



357 



may transfer the partnership effects directly to a creditor of 
the firm, without the knowledge or consent of his associates, 
and that the courts will sustain his action. 

Under the National Bankruptcy Law, however, in any case 
where an assignment is made when the firm is insolvent, any 
aggrieved creditor may proceed under the Bankruptcy Act. 

For the liability of individual partners to third persons, 
see §§ 287, 300. 

Note: 

I. If an assignment of partnership property has been 
made, any creditor can institute bankruptcy pro- 
ceedings. 

§ 296. Profits 

The sharing of profits is an essential feature and the usual 
object of a partnership. Ordinarily these profits are ascer- 
tained by deducting the current expenses from the current re- 
ceipts, or gross profits, or, on dissolution or any general 
accounting, by deducting the firm indebtedness and the original 
partnership investment from the total partnership assets. As 
there is often room for differences of opinion as to what con- 
stitutes profits, it is well to define in the articles of association 
how they are to be determined. 

In the absence of a special agreement otherwise, the com- 
mon law rule governs the division of both profits and losses. 
Under this the partners must share equally, without any varia- 
tion, or any allowance for the greater value of services 
rendered, the greater amount of time devoted, or the greater 
investment made by one or the other of the partners. This 
is usually arranged by agreement, however, so that partners 
who devote more time or money to the business, receive a 
more nearly commensurate return. Salaries for services and 
interest on investments are sometimes provided for in the part- 
nership agreement. 



358 



PARTNERSHIP 



The rule Of good faith requires that all profits made within 
the scope of the partnership business shaU be turned in for the 
benefit of the entire firm. If any partner violates this rule and 
uses his position in the firm and the knowledge he has of the 
busmess to secure any secret rebates, commissions, or other 
profits for himself, he wiU, if discovered, be held liable to the 
firm for the amount so realized. 

If a partner uses firm funds in his private speculations he 
can be compelled to account for any profits. If the result is a 
loss, he must bear this himself, returning the partnership funds 
intact This rule also applies to the use for private gam of 
time or skiU which should be apphed to the firm business. 

Right to an AccounHng. Every partner is entitled to have 
accurate accounts kept. The right exists whether or not any 
reference has been made to it m the terms of agreement. This 
makes it the duty of each partner to keep an accurate record 
of his own transactions concerning the firm business. If, as is 
usuafly the case, some one partner or some particular employee 
is designated to keep the firm's books, it is the duty of each 
partner to furnish such accountant full information as to his 
transactions. 

It is also the right of every partner to have access to the 
firm's books and accounts and to make extracts therefrom. 

In closing the books to ascertain amounts due partners the 
partners are bound by a bookkeeper's statement either by 
mutual signature thereto, or by failure to object within a 
reasonable time after submission to them of the statement; 
or by any action which would imply acceptance. 
Notes: 

I. Any proposed extra share of profits to any partner 

should be specified in the partnership agreement 

a. The books of account should always be kept at the 

office of the firm, or, if it has more than one, at 

the principal office. 



PARTNERSHIP PROPERTY 



359 



Partners should make every effort to keep their 
accounts straight, for, if the accounts have been 
garbled or falsified or the books mutilated, every 
presumption will be allowed against the partner 
who is at fault. 



Review Questions 

1. What is the capital of a partnership? 

2. What does the partnership property include? 

3. May a firm pass title to personal property of the partnership by 

bill of sale in the business name of the firm? 

4. May a member of a firm sell out the entire assets? 

5. Can a partner sell firm real estate? 

6. May a good title to firm realty be passed without the wives of 

the partners joining in the deed? 

7. A and B are partners. C recovers a judgment against A for 

a personal debt, but can find no personal property on which 
to levy. What can C do? What effect has the bankruptcy 
of one of the partners upon the partnership? 
a Define partnership profits. What is the general rule for division 
of profits? If the partnership agreement merely provides for 
division of profits, how will losses, if any, be borne? 

9. A firm composed of three members was about to dissolve part- 

nership and go out of business. It occupied, and had for many 
years, premises which the firm leased and did not own. One 
of the members, without the knowledge of his copartners, 
obtained a lease of these premises some time prior to the 
dissolution of the firm, but when it was contemplated; the 
new lease to begin when the old one expired. After the 
dissolution, he sold the lease for a large sum of money. Is 
he under any obligation to account to his partners for the 
profits thus realized as if the same were partnership property? 
Give reasons for your answer. 

10. A and B are in partnership under a written agreement whereby 

A because of his greater investment and experience is to have 
two-thirds of the profits, nothing being said as to losses. At 



36o PARTNERSHIP 

expiration of one year the firm dissolved, having lost $5,000. 

How will this loss be apportioned? Why? 
When a judgment is obtained against a firm, can execution be 

levied on the personal property of the members? 
How should the assets of a copartnership, and the assets of the 

respective individual members thereof, be applied when the 

several members owe individual debts in addition to the debts 

owed by the copartnership? 
In closing books to ascertain amounts due partners, what is it 

necessary to do in order to bind partners to results shown? 



II. 



12. 



13. 



til 



CHAPTER XLVI 

POWERS AND LIABILITIES OF PARTNERS 

§ 297. Powers of Partners 

In a partnership each partner has equal authority with 
the others and is held to be the agent of the others, and of the 
firm, for any transactions within the scope of the partnership 
business. Hence each partner within this limit is bound by the 
acts, the contracts, and even the frauds of his associates, and 
is responsible for the obligations and liabilities so created as 
fully as if he had himself acted or contracted. 

In the absence of special restrictions on the agency powers 
of the partners, they are limited only by the scope of the 
partnership business and by the ordinary limitations of the 
powers of agents. Thus, under his general powers, a partner 
acting alone may bind the firm in any matter properly withm 
its business operations. He must, however, be authorized be- 
fore he can bind it by executing a sealed instrument m the 

firm name. , 

Partnership notes, as firm obligations, come under the 
general rules for mutual agency. Every member of a trading 
firm has a right to make and indorse notes, and to make, 
accept, and indorse drafts and other commercial paper in the 
firm name. One of the members may use this power fraudu- 
lently or for his private benefit, but, unless the payee or owner 
of the note is aware of this fact, the firm is liable on the note. 
In the case of a non-trading or professional partnership, 
however, it is not customary for the partners to bind the firm 
by issuing negotiable paper, and unless it can be shown: 

361 



S62 



PARTNERSHIP 



III I 



II 



If the business does not rpninV- *,^* 
instnnnent signed by a paS^l^ 1°^"'''"'^ ^^ ^"^ 
ejected or accepted'at '^I^Zont Z Z "^^ "^^ "^ 
»t cannot be enforced against the firT 2? k 1 "'"=''*^' 
signing would be liable. ' "^'' *^ Partner 

as such an act wouldTl^ S.^^* ^/f^-i^-^ — - 

of fte partner, but if such a note wT^e ZZZ^ "*°"*^' 
on for value to an innocent »,«m -. "^ ^^^ Passed 

A« indorsement Tf TS^fb '^°"'*^ """^ *^ «™- 

of a third party, outside oTth^Spe'^of'^r; °" ^ "°*^ 
ness, would be void. ^ ^ Partnership busi- 

an oi t^Se^^illT''' t^ ^^^^^ °^ -^ -e or 
articles. sX^tSS do nTh " '^ """''^'^^"^ '" *e 
sons, unless they have h n^d "^fX'Snf 7 ^^^^^ P^^' 
partnership. the partner whose Kabrntfr, T!' /" * ^""^^ 

part in the management. In uA att 2T1 '?" *^^ "° 
powers and the general nature «^ a ^ '"Stations of his 

to *ird parties LdeT'th'^^^^^^t Stetj "^ -««^«^ 
such partnerships. ^ °* "''^ "aws regulating 

eni%ri:%:r:o£vrmir' ^^ ^'^^ ^^^ 

without regard S the amounTorv °?^^«"«'t of its affairs 
n«y decidf an nutteHrbus 1^"^^"*. ^^"^i-Hty 
relating to the general conduct of l'^'^ ""^ ^ •1"^^*'°'« 
t«» what extent%rofits a7e to t Jiv'ded""' "^^ "'"^ ^^^ 
-atters are not prescribed in the t^cltsoTc" "^ ^"^ 
^' -^o^^^ -, however, in JT^ ^V^'^ 



POWERS AND LIABILITIES OF PARTNERS 



363 



consult with the minority in regard to any proposed action, 
and must allow the minority to be heard in discussion of the 
same. They cannot apply the capital to new undertakings 
outside the scope of the partnership business, nor can they seek 
their own interest as against the common interest 

Where the partners are evenly divided concerning any 
proposed action, a deadlock results and those who want to 
make a change are at a disadvantage. In a partnership of two 
no change can be made and no new action undertaken unless 
both can agree. Where articles of copartnership exist no 
change can be made in any part save by unanimous consent 
of all the members of the firm. Disputes among partners 
generally result in dissolution and final accounting. Some 
partnership agreements provide for arbitration, but the courts 
generally refuse to sustain arbitration and decree a dissolution 
instead. 

A single partner, by reason of his powers as an agent of 
the firm, may often commit his associates to action against 
their wishes. In such case, the only remedy is to dissolve the 
partnership. 

A partner as such does not generally have authority to 
do any of the following acts, except where his partners have 
wholly abandoned the business to him or are incapable of 
acting: 

1. To confess judgment. 

2. To dispose of the good- will of the business. 

3. To make an assignment of the partnership property 

to a creditor, or to a trustee for the benefit of a 
creditor or of all creditors. 

4. To do any act which would make it impossible to 

carry on the ordinary business of the partnership. 

5. To submit partnership claims to arbitration. 

As to partner's power over firm property, see § 294. 



364 



PA&TNERSHIP 



III! 



■" |l: 



Notes: 

I- """y^striction is to be made on the agency powers 
be notified m order to protect the firm 

own fault ,f he accepts notes and contracts that 

S thTl^^'T- *.'^'''' "*'* ^'"^ *« «™t« 
ot the partnership business. 

^ L^^luV^^T'^'^y' ^' "^y bind his CO- 
partners without right 

§398. Liabilities to Copartners 

who^'rrfL'^s? \T^'' ^^^*'''"' -•^ *- 

their assodates S^l ^'' ''^""'''^ ^^ ^^'^^ toward 
the L^. I?',,- '^ P^r^" "^y ^^ ''is own advantage at 

and pnvate profit out of a transaction in the h„e of S^J^ 
nership busmess. AU transactions must bl for th! ^ ^ 
good and in important matters a pTiSer sh^d el, T.T 
assoaates before taking action "^' •"' 

proft ^T7 *'" "°' '^ ""*'*«' *° '"^in »n "«fairly made 
prow, nor to compete with hk fJr™ tr / 

pressly restricted bThis^nlf J?" "'^^' "^'^ «" 

;«^ J **-"*// lus pannership ac^reenient carrv «« *^ 

ndependent non-competing business of lis o^'pr^Sed tht^ 
It does not mterfere with Ws duty to his fi^ T 1 
nuule in a competing busmess, or 2^ a bules^that h"^ ??'* 
fere with the firm business w^uld L he^d To W k T 

for the firm, and the other partners conM , ^." "'^''•^ 

date to account for his unfarSte H^ Tf^u''' "*^ 
for the firm for any gains 1^7 a "'** ^ * *™^t« 

a frustee for any pZeS^u^ch.!' A ^ l"'^"' ^°"'' ^^^'^ >>«= 
ship funds. ^ ^ ^^ '^"''''"'"' "^ '^'^ "^« with partner- 
In the absence of any restrictions in the articles, a partner 



POWERS AND LIABILITIES OF PARTNERS 



36s 



tnay give to non-competing ventures time which might have 
been devoted to partnership affairs. He may also use informa- 
tion acquired by him in the partnership business in his private 
undertakings, provided these latter are not within the scope of, 
and do not compete with, the business of the firm. 

Notes: 

1. Good faith is necessary in all dealings between part- 

ners. 

2. The partnership agreement should provide that each 

partner shall give his whole time, or a specified 
part of his time, to the partnership affairs. 

3. A partner can retire at any time and so dissolve the 

partnership. 

4. A retiring partner should examine the local laws 

with care to make sure he has complied with the 
legal requirements for notice of the severing of 
his connection with the firm. 

§299. Intra-Partnership Relations 

A partnership is not a separate entity as is a corporation. 
It cannot sue or be sued in the firm name. Suit against a 
firm or by a firm is a suit against or by the individuals who 
comprise it. Therefore a partner cannot sue the firm, neither 
can the firm sue one of its members. 

In event of partnership controversies, which cannot be set- 
tled by conference, by buying out one or more partners, or by 
arbitration, the only recourse is a dissolution and accounting. 

A partner cannot sue another partner for any matter re- 
lating to the partnership but can sue him for any individual 
cause not relating to the partnership. 

Two partnerships having common members or a common 
member cannot bring suit against each other. In some part- 
nership cases when actions at law will not lie, an action may 
be brought in equity but in such case it usually means the 



Ilifi 



$66 



PARTNERSHIP 



POWERS AND LIABILITIES OF PARTNERS 



I. 
2. 

3- 



dissolution of the firm Th* <r««i4>..^i i , 

nership cases are: ^'"^ "^^ °' "l'"^ ™ P^^* 

Not to interfere except to dissolve the partnership. 

Not to interfere in internal disputes 

Not to interfere on behalf of the offending party 

or where the party applying has been negligent 

in making application. 

In some cases, however, a court of equity will erant an 
^^on without decreeing a dissolutio^" It wodl^i" 

in a partnership controversy. 

§300. LiaWUties to Third Persons 

Where a partnership is admitted or proved and wher^ , 
contract within the scope of the partnership bSnShls^ 

fte STnl i'^""'* *.' ^""' ^^*="*'°"^ "^y be levied on 

SrrS^er? ;'' *' '1'*'"°" ""^^ *^^ judgment against 
aU the partners and may then proceed to coUect their daims 

from firm assets or from the property of any one or mo^^ 
&em. leavmg Ae partners to adjust the matter between the,^ 
selves afterward as best they may. 

A partner is liable in damages for the torts frauds :,«A 
wrongdoing of his partner within the scope of Ae pTrtnerSo 
business, but usually he will not be held crimin^^Se ' 
hact'^f Z° ^^ ^"^ *^"» » »fter the partnership 

t fi^nrion-" T "^^'"•"'^ '°^ obligations'or a^T^f 
the firm pnor to his entrance, unless he expressly assumes them 

, Notes: 

I. In order to enforce partnership liabih'ty, third per. 
sons must as a rule prove the existence of a 
partnership. 



367 



2. 



The onerous character of partnership liability de- 
mands prudence in selecting a partner. 



Review Questions 

1. What relation of a partner to the firm gives him authority to 

act? What is the limit to this authority? 

2. Has a partner authority to make and indorse commercial paper 

for his firm? If he discounts the firm note for his own 
benefit, is the firm liable? What is the rule for professional 
partnerships ? 

3. What effect do limitations on partners* powers in articles of 

copartnership have on outsiders? 

4. A sells goods to a partnership on the customary terms in his 

line, namely, four months' credit. The goods are delivered 
and used by the firm, but when the amount is due, payment 
is refused on the ground that the partnership articles stipulate 
that no partner shall bind the firm to a time-purchase contract, 
but that all purchases shall be cash. A knew of this agree- 
ment. Can he recover? Explain the theory. 

5. How are differences of opinion settled in a partnership? 

6. What things are beyond the authority of a partner to do unless 

specially authorized? 

7. May a partner take part of his time for his own affairs? What 

is the effect if he engages in a business that competes with 
the firm business? 

8. Can one partner sue another? Can one partner bring suit 

against the firm? Can the firm bring suit against one of its 
members ? 

9. May one partner bring suit against another for what may be 

due him on partnership account? 

10. If a partner buys a debt against his firm, can he collect it by 

law? 

11. What is the liability of an incoming partner? 

12. Is the new member liable to creditors of the old firm by a con- 

tract made with the members of the old firm to assume the 
old debts and be liable for them as old members? 

13. When would a partner be a trustee for his firm? 



TERMINATION OF PARTNERSHIP 



369 



llli 



n 



CHAPTER XL VII 

TERMINATION OF PARTNERSHIP 
§301. Termination by Agreement 

Upon the expiration of its term as limited by the partner- 
ship articles, the partnership wiU be dissolved in any particular 
manner prescribed by the articles, or. in the absence of such 
provisions, m accordance with the rules of law. 

A partnership may be dissolved at any time by unanimous 
agreement regardless of the period fixed by the articles If 
any of the partners wish to continue the business, they may 
buy out partners who wish to retire or who are dissatisfied 

In many cases the most satisfactory method of disposing 
of a partnership business worth preserving, is by incorpora- 
?; . . '? preeminently a dissolution by agreement. (For 
methods of incorporation, see Chapter L.) 

§303. Enforced Dissolution 

A partnership may be terminated by the death or bank- 
ruptcy of a partner, or by the sale of his interest. It may also 
be dissolved because of the impossibility of continuing the 
business for any reason, or by the bankruptcy of the firm 
Mere insolvency may exist for an indefinite period without 
affecting tiie partnership relation, but an assignment by the 
farm for the benefit of creditors, or an adjudication of bank- 
ruptcy terminates the partnership. 

• If a partner sells his interest in the firm to a stranger it 
would usually terminate the partnership. Neither the straneer 
nor the other partner or partners, can be forced to accept 



each other as partners and either can take steps to wind up 

the firm's business. 

If a partner wishes to terminate his partnership relations, 
he may do so at any time simply by giving notice: (i) to 
the members of his firm, (2) to those dealing with the firm, 
and (3) to the public generally. If the partnership was for 
a given term which has not expired, the partner may be liable 
in damages to his associates for his breach of the partnership 
contract, but he cannot be compelled to remain. 

After giving proper public notice of his withdrawal, the 
retiring partner is no longer Hable for the future transactions 
and obligations of the firm. He remains liable, however, on 
the obligations contracted while he was a member of it. The 
matter of notice is important, as it is the only way in which 
liability for the future obligations of the firm may be escaped. 
Owners of a business concern which had changed from a 
partnership to a corporation have been held personally liable 
for the debts of the corporation because they neglected to 
notify those with whom they were dealing that the business 
had been incorporated. 

When a partner dies or becomes bankrupt, or when war is 
declared between the countries to which the respective partners 
belong, the partnership is forthwith terminated, the relation 
of mutual agency ceases, and neither a partner nor the rep- 
resentative of a partner can bind the partnership nor the 
property or estate of either partner further. Nothing can be 
done except to liquidate, pay debts, and wind up the partner- 
ship affairs. 

The insanity of a partner does not work a dissolution, but 
may be a sufficient reason for asking a dissolution by decree. 
If the insanity is temporary, the courts will not decree a 

dissolution. 

Where it becomes apparent that only loss can result from 
the further prosecution of the partnership business, any part- 



inSBVISHM 



370 



PARTNERSHIP 



m 



ner if his associates wiU not agree to a peaceable termination 
of the business, can obtain a judicial dissolution. 

A breach of the articles of partnership by any of the part- 
ners, bad faith, or misconduct so serious as to affect the credit 
and success of the business or to make it impossible for his 
associates to work with him, is good ground for dissolution 

In case a person has been induced to enter a partnership 
by false representations, he can at once dissolve the firm or 
brmg suit to have the whole contract rescinded and cancelled 
In all of these cases, proceedings may be instituted to 
have the partnership dissolved and to secure an accounting If 
necessary, an injunction may usuaUy be had restraining the 
defendant partners from making new firm obligations, from 
interfermg with or disposing of firm property, or from further 
conduct of the firm business. The appointment of a receiver 
is an extreme measure to be resorted to only when the interests 
of some member of the firm, or of outside creditors are in 
urgent need of protection. The courts are slow to grant it. 

The right to an accounting is a necessary corollary to the 
right to profits. An accounting is a necessary incident of a 
dissolution unless the parties have already agreed upon a settle- 
ment, which would be a bar to the right. The usual procedure 
IS to appoint a referee, or refer the accounting to a Master in 
Chancery to examine and report the terms of the partnership 
the accounts that have been kept, the capital invested and with- 
drawn, the profits and the losses, the assets and liabilities and 
the proportion in which these should be shared among the 
partners. The court then makes its orders in accordance with 
this report, and the receiver, or the partner or partners in 
charge, wiU close up the business pursuant to these directions. 

Notes: 

1. Where it is necessary actually to wind up the busi- 
ness, any agreement reached between the partners 



m» 



TERMINATION OF PARTNERSHIP 371 

Should provide for a trustee to take charge of the 
settlement on behalf of the partners. Thejjee 
ment should direct the closing up of the busine , 
L liquidation of its assets, the collection of out- 
Sig debts, the setUement of its obhga ions 
the partition of losses or the division of profits 
Tnd the withdrawal of the investments of the 

uSeTno' circumstances have the partners in an 
ordinary partnership the right to expel an objec- 
:ibJmUer. Theonly way toget ndof suA 
a partner is through a dissolution of the copart 

, ThTlegS' enforced dissolution of a partnership is 
'■ ^'s ow'and costly and if possible shouM be aWed. 
Almost any agreed dissolution would be better. 

8,0^ Winding Up the Business 

§303. vvin Br Partners Unless otherwise 

Rights and Interests of ^f 5^ ^ i^ returned 

aweed the amount of each partners investmeni 
! i!f^ in full on dissolution of the partnership, if there are 
rurenras:fts° Any remainder, ^^^^^^^^^ 
^en divided in ^f^lZ:^::^^!,^^^^^ equally 

'"'"''''^TZ^^f.rtl^^^^onnt to belaid each on his 
among the partners, ana t ^^ ^j^t 

investment account mu^tb ^^^^^^^ ^^ ^^^^^ p,,,es 

" ^rLX? ntTtheTands of the remaining partners, 
as a g«'ng ~"?f."'.^"^^^„i^ed by proceedings in equity or m 
If the ^^'^^l^^;;,2X^..s charge, and the part- 
bankruptcy, the eceiver or ^^^^^^^ ^^^ ^^^^ 

Z^::^^^ thfbusiness oUier than to give such in- 



37^ 



m 



mi 



PARTNERSHIP 



TERMINATION OF PARTNERSHIP 



373 



succeeds to the assets, name, good-will, and location of the 
fimi, and the business is continued as a going concern with 
the minimum of disturbance. 

DuHes of Partners on DissoluHon, If the business is 
terminated by agreement, by Kmitation, or by the death, in- 
sanity, or insolvency of a partner, it is usually wound m by 
the survivmg or liquidating partner or partners. 

When surviving or liquidating partners take charge, it is 
their duty to notify people who have dealt with the firm of 
Its dissolution and of the fact that they are engaged in wind- 
ing up affairs. It is also the duty of these partners to dispose 
of and fulfil any existing contracts, to dispose of the partner- 
ship property to the best advantage, to discharge all debts and* 
obligations, and to turn over to each person entitled thereto 
his due proportion of the surplus. 

Right of Surviving Partner, In the case of the death or 
resignation of a partner, the surviving partner or partners 
have a right of possession for the purpose of settling up the 
affairs of the partnership, but after this is done the right of 
possession ceases, and each of the partners has the right only ' 
to his proportion of the partnership assets when converted into 
cash. 

A surviving partner or partners would have power to sell 
property of the firm and do all other things necessary to wind 
up the business. 

After the assets of the firm have been turned into cash 
and the debts have been paid, it is the duty of the surviving 
or liquidating partners, first, to repay any advances above the 
stipulated investment of capital to the partners who made 
them; next, if the funds permit, to return the capital of each 
partner. Any surplus is then divided among the partners in 
such proportion as the partnership agreement may provide, or, 
if there is no provision therefor, in equal proportion. 

The surviving partner, if he continues the business, must 



account for the value of the good-will of which the firm name 
is part. 

f^o tes * 

1 Surviving or liquidating partners have no power to 

bind the firm to new contracts or to undertake 
new business. Ordinarily they are not entitled 
to compensation for their services in settlmg Oie 
firm's affairs, unless the business is to be earned 
on for some time. 

2 The good-wiU of a business is often a most valuable 

asset. To secure compensation both for the good- 
will and the firm name, it is usually necessary to 
sell the business as a going concern. 



Review Questions 

1 In the absence of an express agreement, what is the rule for 

determining the duration of a partnership? 

2 How could a partnership be terminated by one of the partners 

before the time fixed in the articles? 
, What happenings will terminate the partnership relation? 
4. Can a partner sell his interest in a firm, and if so. would the 

purchaser be a member of the firm? 
c A, who is in partnership with B, desires to withdraw from the 

firm because of B's business methods. A offers to sell his 

share to B. The latter refuses to purchase. A then assigns 

his interest in the business to C, but B refuses to accept C 

as a partner. What are C's rights? 
6. What notice should a retiring partner give? Why? 
,. If a retiring partner agreed with those remammg that they 

should assume all debts, would that protect him as against 

existing creditors? . 

8 Would the admission of a new member terminate the old part- 
nership and create a new one in law ? Need it have that effect 

in practice? 
9. When may a receiver be appointed? 



374 



PARTNERSHIP 



10. Why should an enforced dissolution be avoided? Suirir^st ,n«. 
better methnH« r^f «,;«^- «»»umca. :>uggest some 

rt , '^T^.'"^^'^««^s of winding up a partnership. 

n. In winding up the affairs of a partnership: (,) What is the 

^^r .e o.„ ^rer/;r.: . -E X caS 

'"■ '\sse7slif V:l7T"' *° "''°'" *""^ '*^' ««<^ '° fi™ 

^vecL title? r f"""^'"« P*""" ^" P~P«"y =""1 

give good title? Can a sole surviving partner make a eener-,1 

assignment without consent of represenutives ^dJJZT 



1 



PART IX 
CORPORATIONS 



ill 



'!(■ 



CHAPTER XLVIII 

NATURE OF CORPORATIONS* 

§304. Corporate Entity 

A corporation is an artificial person, created or authorized 
by the law for some particular purpose or purposes. It has, 
therefore, only those rights and powers which are given it 
by the law. These vary in the different states but are m all 
cases sufficient for the demands of ordinary business. 

A corporation is usually composed of a number of persons 
associated together, though it may. and sometimes does, con-^ 
sist of but one or two members. These members, or stock- 
holders, are not, however, the corporation. They compose it, 
but the corporation has a name, an entity, and an existence 
of its own, entirely apart and distinct from diat of these 
members. Under its corporate name it may conduct busmess. 
make contracts, and bring suit. So absolutely different is the 
corporation's existence from that of its stockholders that it 
may^enter into contracts with these latter, may sue them, or 
be sued by them. 

305. Classification 

A logical classification is that which separates an corpora- 
tions into : ( I ) public and ( 2 ) private corporations. 

Public corporations are those formed by the community 
for its own governmental purposes, as in cities, villages, and 
towns. These are also called municipal corporations. 

All other corporations are private corporations. 

Corporations formed to conduct public utilities, such as 

<S<e Clupten CVI to CVIII, corporate forna. 

377 



378 



CORPORATIONS 



NATURE OF CORPORATIONS 



379 



railroads, turnpikes, and telegraph systems, or to supply water 
gas, and electndty, if they are conducted for prSe ^L' 
are properly clashed nc ,^«,ro* privace gam, 

times cS "ol?. Kr ^^^T^^^^'^n^- They are some- 

«mes caUed quasi-public corporations" because they render 

«eTLT" ;": '-.r"«^ to the public. More often ^ 
are termed public utility corporations." ^ 

A moneyed corporation is one authorized to en^aw in 
Ae business of using money for the sake of making f Lfit 
upon ,t as money, such as banks, mortgage loan or tnist ro™ 
pames, insurance companies, etc. ™' 

Corporations may also 'be classed as: (i) corooration, / 
sole, those consisting of a single person; and (V) ZZ^ZZ ^ 
aggregate, those consisting of two or m;re peLns^ 

wither" .f.'T^'"^*'*'"^ ""^y ^ divided into corporations 
without capital stock and corporations with capital st^k 

§306. Corporations Without Capital Stock 

^.nH^"'* Z*^'^''"'' "'"'^"'•'"*'' ^''anteble (eleemosynary) 
a«d social organizations belong to this class. They arnl- 

stlSTeSt "' T"^ '" *^' ™""'^^^- ''"t **«e are not 
TJLT ? .^. ^'' "°* "^"^'y transferable. When 
corporate action ,s taken, each member has one vote wi7hout 
regard to the amount of his financial interests, if aLv n I 
corporation. - ' " "le 

^tJ!"^ "^^ °* '"°*'*'"' corporation law has to do with the 
stock corporation 

1 307. Corporations With Capital Stock 

.,«.S'^/rr'**^°"' ^'"'^ * ^^P'*^' ^'^'^'^ divided into shares 

cm£t: o'f stLr T^''** r ^^•'^"«'' •'y *--^"able 
memW "f 1 ''''* '*°''' certificates are issued to the 

members of the corporation, who are termed stockholders the 
certificates evidencing the number of shares which each owns 



The ultimate control of die corporation rests with the 
stockholders, who act in meetings and by vote. Each share 
of stock usually entitles its owner to one vote in stockholders 
meetings hence those owning a majority of the shares con- 
trol the corporation. When profits are to be divided, they are 
distributed among the stockholders in proportion to the num- 
ber of shares owned by each. 

On account of the convenience of the system, aU corpora- 
tions intended for profit are organized as stock corporations. 

§308. Distinctive Features 

The distinctive features of a modem stock corporation 
may be summarized as follows: 

I. Its creation and regulation by the state. 
2 The limitation of the corporate powers to the objects 
specified at the time of its creation, or later by 

amendment. ,, ,. t/ 

The limitation of the liabilities of the stockholders. 
The distinct entity of the corporation for all legal and 
" business purposes. 
The comparative permanence of its organization. 
The representation of the interests of the stockholders 
! in the corporation by transferable shares of stock. 
The corporate mechanism of directors, officers, and 
agents, working under definite rules of action. 
These features are possessed by every stock corporation, 
and every organization possessing them is a stock corporation. 

§309. (i) Creation by the State 

A partnership may be formed by the mere agreement of 
the parties. A corporation, on the contrary, may be created 
only by the state. Formerly each corporation was created by 
a separate legislative enactment. Today the formation of 



3- 
4- 

5- 
6. 

7- 



38o 



CORPORATIONS 



NATURE OF CORPORATIONS 



381 



'ii 



corpofations is governed by general laws. These laws vary 
in minor detaUs in the different states. All are alike in their 
generd plan and scope. In each state, the legal requisites are 
to be found in the state law. 

§ 310. (3) Limited Powers ^ 

th.t'*" '"•'•r'"*'"^' °l > partnership may engage in any business 
that seems best, and may change from one business to another 
at pleasure. A corporation, on the contrar^^ is limited to those 
purposes enmnerated in its charter. If it is desired to engage 
m any other business, it must amend its charter. 

§3"- (3) Limited Liability y 

Subscribers to the stock of a corporation are liable to the 
corporation for their subscriptions. Calls for payment on un- ^ 
paid stock must be impartial and uniform, that is to say calls 
must be made on aU subscribers alike. If the subscriptions- 
have not been paid, the corporation, or its creditors in case 
Of Its insolvency, can compel payment. A subscriber cannot 
repudiate h.s subscription. If subscriptions have been accepted ' 
by the corporation at less than par, corporate creditors can 
usually force payment of such additional amounts as win 
render the stock fuU-paid. (See §353.) 

A subscriber to stock who fails to make his payments is 
chargeable with interest from the time he makes default He 
must pay both principal and accrued interest before he can 
claim a negotiable certificate of stock.* 

A subscriber to stock, being sued for payment, and claim- 
ing that he was induced to subscribe through fraud must ' 
show that the agent was duly authorized by the corporation 
fliat his statements were in fact of the condition of !he cor- 
poration m past or present time and that his representations 
did maten ally influence the subscriber to take the stock. 

•Cook on Corporationi, ii* 



i 



Beyond this liability, known as the subscription liability, 
stockholders have in most states no individual liability for any 
indebtedness of the corporation. 

§ 31a. (4) Legal Entity of Corporation 

The distinct legal entity of the corporation may best be 
shown by a comparison between corporations and partnerships. 

The difference is radical. . ^. ., * 

A partnership is merely a coUection of all the mdividual 
partners. Hence each partner represents the partnership fully, 
can make contracts for it without consultation with other part- 
ners, and can bind it by his action. On the other hand, he 
cannot contract with his partnership, bring suit agamst it, or 
be sued by it, any more than he could so act with or agamst 
himself. In any suit by or against a partnership each partner 

must be named. ^ , t • 

A corporation, on the contrary, is itself a legal entity, 
distinct from its stockholders. These stockholders as indi- 
viduals do not represent it, cannot make contracts for it, nor 
bind it in any way. Each may, however, deal with the cor- 
poration as with a stranger, may contract with it, may sue it, 
may be sued by it. A corporation sues or may be sued by its 
corporate name and the members* or stockholders' names do 
not appear. 

§313- (5) Permanence 

A partnership may be dissolved at any time, at the will 
of any partner, and is necessarily dissolved if a partner dies, 
becomes insolvent, or sells out to a stranger. A corporation, 
on the contrary, continues for the term of its existence, un- 
interrupted by the dissatisfaction, financial embarrassment, 
death, or retirement of its stockholders. Its entire member- 
ship may change again and again, but the corporation con- 
tinues. 



382 



CORPORATIONS 



ff I 



I 



r 



§314- (6) Stock System 

The division of the stock of the corporation into shares 
represented by stock certificates, transferee by indo^«nr 

pves each investor his proper proportionate interest both in 

It permits a ready sale of part or all of the stockholder's in 
terest to some other investor. In case of his deaA it rend « 
Ae transfer or division of his interest a simple mat r ft ' 

Z T^7 ""'"'* *° *^ ''^'^'y °f transferring a. intere^ 
«i an ordinary partnership. ^ merest 

§ 315. (7) Corporate Mechanism 

th. Ir'^J^!!"" " "'^*"' ^y **^ ^^«"t of a charter from 
*e state, which ,n general terms defines the rights and pow^ 

of the corporauon. After this charter has been aUowS S 

incorporators hold a meeting and adopt by-laws whiS llv 

down the lines along which the business ol the corpltt on 

.s to be conducted. The stockholders elect a board of dlTto^ 

^ontrols and manages the business and property of the cort^S 
The directors at their first meeting elect officers and take 

ume 10 time as may be reqmred by the bv-IawQ or tuJ^^ 

ties of the business. ^ ^ ' ""^ ^^ "^^s«- 

§ 316. Attractiveness to Investors 

^ustof STiS" °' f ''''"*^^" enumerated, and be- 
cause of the habdities and inconveniences of the partnershio 
the corporate form i«? n<^itri*«i,.i.r «** x* f<i' "icrsnip, 

Mv *ic lunn is peculiarly attractive to the investing 



NATURE OF CORPORATIONS 



3S3 



public. Created by the state for a fixed period, it is not 
liable to sudden or unexpected termination. The rights and 
liabilities of all concerned are defined by law and well settled 
by custom. It permits investment to a definite extent without 
indefinite or continuing liability and without the necessity of 
the investor becoming identified with the management. 

§317. Disadvantages of the Corporate Form 

The disadvantages of incorporation result from the fact 
that special report s and s pecial taxes a re required of corpora- 
tions, above those required of sole traders or partnerships. 
Most states require reports as follows: 

1. Local tax reports. 

2. State tax reports. 

3. Federal tax reports. 

4. Annual reports of officers, etc. 

5. Reports in each state outside the home state in which 

tiiie corporation does business, 

The taxes paid by corporations at various times are as 
follows : 

1. Organization taxes payable to the state for incor- 

poration. 

2. Annual franchise taxes paid to the state under the 

laws of which it was incorporated. 

3. Annual taxes on property. 

4. Federal income arid excess profits taxes. 

5. Inheritance taxes on stock. 

6. Stock-transfer tax. 

7. Taxes and license fees in each state outside the home 

state in which the corporation does business. 

8. Excise taxes. 



384 



CORPORATIONS 

Review Questions 



2. 



What is a corporation? Distiii«iish a rnrn««*- t 
membership. 's"ng«isft a corporation from its 

Distinguish between public and private coroorationc uru . 
public utility corporations? WW ^^'T^'^^*'^"^- What are 
corporation f '^'P^'^''^"^ ' ^^^' « * moneyed or financial 

'* "^^^srlf'^^^^^^^ To which 

A WW f '*""" corporations belong? 

t wta Tat"" 1 ''"^' ^^-t-- stock certificates? 

wLusrc^of.: r^"'^^"* What is a corporation sole? 
wnat is a corporation aggregate? 

Xho:,;'' ""^ "'^"""'^^ ^^''^^ °^ » -<>er„ stock cor- 

o i,ru . requisites for incorporation ? 

«. What IS the difference between the nnw*.re r.f 

Why is a corDo^^orr.nr °^ ''°** * corporation sue? 

How can an i^-? r P^^^nent than a partnership? 

2 .n? ""/"•""' '" » ™n>oration be transferred? How can 

13- Explain the stock system 

IS. Why .s the corporation form attractive to investors? Whv u 

re. wS srta^s-arh t r ■-- •---- --Sl ? 

uvtfuwges attach to the corporate form? 



la 
II. 

12. 



CHAPTER XLIX 

THE CHARTER' 

§318. Definition — Synonyms 

The terms, certificate of incorporation, articles of associa- 
tion etc., are synonymous with the older and briefer word, 
charter A charter is the formal authority from the state for 
the existence of a corporation. It is to the corporation what 
a constitution is to a civil government. It is the foundation 
upon which the corporate structure is built. 

The charter creates the corporation and authorizes certain 
specified individuals to organize it and conduct its Operations. 
Charters were formerly granted only by special legislative 
enactment. Now they may be secured under general laws and 
in many states can be secured in no other way. 

Charters are granted under diflferent statutes varying in 
terms and requirements according to the purposes of the 
corporation. The simplest charter is usually that provided 
for a manufacturing or mercantile business. The require- 
ments and Umitations for the charter for a bank, a railroad, a 
telegraph company, or a college would differ widely. 

§ 319. Charter Powers— General 

The grant of a charter bestows upon a corporation all the 
powers properly specified in the application for a charter. In 
addition to these specified powers-which are usually those 
necessary to conduct the business or enterprise to be under- 
taken by the corporation-the charter confers certain general 

~S«,1» Ctaptet L. For fonn of chwt«, «< ChaptM CVI. Form 54- 



386 



CORPORATIONS 



THE CHARTER 



387 



t 



Po.«i whMh., sp^rf „ <,a„™^ -n^ 

are as follows: 



I. 
2. 

3. 

4. 

5- 
6. 

7. 



To sue and be sued. 

To use a seal. 

To buy, sell, and hold property. 

To appoint directors, officers, and agents. 

To make by-laws. 

To dissolve itself. 

To do all things necessary. 



These are discussed in order in the following sections: 
§ 320. (i) To Sue and Be Sued 

..nJ^T ^ partnership is sued each partner must be named 
separately and be made a party to the action. A corporation 

Tn^A-J'^^^"^ "^^^^ '"^ ^^'^'•^^^ "^^ i^st as may 
an mdividual. No mention need be made of its stockholders 
A summons may be served on any managing officer, on any 
director, or on an agent in charge of the corporate affairs. 

§32i. (a) To Use a Seal 

«W """' M*' 'f """" *' ''''"^'^ ^^**"^^ Of *«= corporate 
signature. Now the corporate signature may be affi^d by 

any properly authorized agent without the use of the seal save 

in those cases where even an individual must use a seal.'as in 

the conveyance of real estate or the execution of a bond. 

of ^IZ^L^ "" ""^^ '"'^ "•* *^ --^^-^ 

S aaa. (3) To Buy, Sell, and Hold Proper^ 

This power must be taken with some quaKfications The 
property must be such as pertains to the business of the cor! 
poration and such as it is permitted to hold under the lawl 
In some states the ownership of land by corporations is re^ 



stricted. Also in many states a corporation may not hold 
shares of stock in another corporation. A corporation must 
dispose of property taken for debt, if it has no charter right 
to hold that kind of property. 

§ 383. (4) To Appoint Directors, Officers, and Agents 
' This power is absolutely necessary as the corporation can 
act only through such representatives. The stockholders at 
their annual meeting elect directors who have charge of and 
manage the corporate affairs. These directors then meet and 
elect a president, a treasurer, a secretary, and such other 
officers as may be desired. Agents may be appointed by the 
directors or by the officers, when authorized thereto. 

§ 334. (S) To Make By-Laws 

The by-laws are adopted by the stockholders. They are 
the working rules of the corporation and provide for the 
details of its operation. The by-laws are subordmate to the 
laws of the state and to the charter of the corporation, and 
their provisions must not be inconsistent with either. Under 
this limitation, however, the by-laws have wide scope. 

§ 335. (6) To Dissolve Itself 

When a corporation has failed in its object, or has become 
unprofitable, or has completed its intended purpose, or has 
disposed of its business and property, its dissolution may be- 
come desirable. Formerly the unanimous consent of all the 
stockholders was generally required for dissolution. Now 
in most states some specified majority of the stockholders 
by simple statutory proceedings may dissolve the corporation. 
In such case the assets are sold, and. after payment of any 
corporate debts, any remaining funds are divided pro rata 
among the stockholders. 



J 



SSB 



CORPORATIONS 



I 



§3*6. (7) To Do AU Things Necessary 

the t '°'^;f *'°" °'-S^'=^d f«^ some specified purpose has 
the legal nght to make all contracts and do all propeV thini 
necessary to carry out that purpose. For instance. T co^^ 

special authonzation thereto have the right to buy and hold 
the real estate required for the erection of its plant 

laa?. Charter Powers— Special 

The special powers of a corporation are those specifically 
m«,t.o„ed m jts charter which, if not so mentioned it would 

formed, with their amplifications, are included among these 

.1 '" T! T"' *' ^^ ^'"'^^ ""^"y ^"rther powers that 
add much to the value of the corporate system. 

Among these may be mentioned provisions as to the issue 
JoZlf «^'^-,^P--» stocks, the system of cumulative 
voting, the power to hold stock of other corporations etc 
A^so restrictions of various kinds may be emLied in Z 
charter, such as limitations on salaries to be paid officers or 
res nctions on the power to mortgage the corporate prop;rty 
or to contract indebtedness generaUy. Property 

§3a8. Things Ultra Vires 

An individual or firm may do anything not forbidden by 
the law. A corporation may do only those things expressly 
permitted to it under the law. All other things are S 
Its powers, or in legal parlance, ultra vires. Contracts not yet 
earned out by the other party, involving matters ultra vires 
camiot be enforced by the corporation; but if these other 
parties to a contract have performed their part, the contract 
may be enforced against the corporation-that is, a corpora- 
taon cannot evade its obligations by the plea of ultra vires 
Directors and officers may make themselves personally liable 



THE CHARTER 



389 



either to the corporation, to its stockholders, or to third per- 
sons, if they involve the corporation in transactions of this 
nature. 

§ 339. Amendment of Charter 

Any corporate right or privilege that might have been 
secured in the original charter of a corporation may. m most 
of the states, be secured by charter amendment, and such 
amendment may be made at any time, even before the organi- 
zation of the corporation is completed. 

As a preliminary step, amendments of the charter usually 
require the assent of at least two-thirds of the outstanding 
stock of the corporation in the manner prescribed by law- 
usually by vote at a regularly called meeting The amend- 
ment so authorized is then as a rule filed in the same offices 
and with the same formalities as the original charter, becom- 
ing effective as soon as allowed and filed. 



Review Questions 

, What is the basic agreement that forms a corporation? Who 
are the parties to it? Give different kinds of charters. 

2. What are the usual corporate powers? Give examples. 

-, What are special charter powers? „ .. 

I What are things ultra vires? What is the effect tf a corpora- 
tion exceeds its powers? 

5. Distinguish between acts of directors resulting in personal ha- 

bility and such as are merely ultra vires. ^ 

6. The president of a corporation in your state went to a batik in 

Chicago and requested the loan on his note of $10,000 for 
his personal benefit. The bank president said that he would 
make the loan if the directors of the borrower's company 
would authorize the borrower to indorse it in the name of 
the company. They did so, the indorsement was made, the 
bank discounted the note, and paid the proceeds to the maker. 
He failed to pay it: proper demand was made and notice 






I 



390 



CORPORATIONS 



of non-payment given. Is the inHor«n,-«. k- j- 
coniDanir; r;„. , "naorsement bindine on the 

7 W^T^I ' '**^'" **" y""' answer. 

7- What IS the procedure for amending a charter in vo„r «« > 

a If a corporation to secure a debt tc^k pX^l^VTl 

d«i not authorize it to hold, what shoulKv^ "* ""'"'' 
9. If sort were brought airainst a r„r. ,.• 

the papers be served f «'''«"''°». "!«» whom would 

^ofB^S '•'' '"~'°" "•"•-^ Who choose the executive 

» JfTcor^lT' ~"^^ "P*""' « ♦«'»S~Ph ''ne ? 

1-*. II a corporation issues stock in exces«s nf ;♦- - *i. • . 

the excess stack valid? authorization, is 



10, 



CHAPTER L 



INCORPORATION^ 

§330. Application for Incorporation 

In former days a grant of a special charter would be made 
to specified persons, authorizing them to conduct some particu- 
lar enterprise under the corporate form. Usually these 
charters conferred some franchise or special privilege, as the 
right to erect a toll bridge, establish a bank, construct a rail- 
road, or build a dam. 

The abuses arising from this method of granting charters 
have resulted in most states in the establishment of general 
laws under which corporations may be formed for any legiti- 
mate purposes, by any qualified persons upon compliance with 
prescribed formalities. In some few states special charters are 
still granted on occasion. 

The form of application for a charter under these general 
laws is usually merely a copy of the charter desired. 

It may be called a "certificate of incorporation," "articles 
of association," or other similar name. It sets forth the names 
of the applicants and the name, purposes, and other required 
details of the projected corporation. It usually also includes 
the proposed capital, the par value of the shares, the principal 
office of the corporation, its duration, the number and names 
of its first directors, the subscribers to its stock and any 
special provisions that are desired. The charter application 
when allowed becomes itself the charter. 

It is executed by the ncorporators, and, after its allowance 
by the Secretary of State, is filed in his office. It must also 

» For incorporation forms, sec Chapter CVI, Forms 53. 57- 



I 



39* 



CORPORATIONS 



usually be filed in the office of the clerk of the county in which 
the corporation is domiciled or has its home. If the proposed 
corporation is for proper purposes, if all fees have been paid, 
and the appUcation is in due form, it is accepted and filed as 
a matter of course and the incorporation is accomplished. 

The details of incorporation as given are the simple forms 
used for ordinary business corporations. The formalities and 
requirements for organizing a public utility corporation arc 
more complex and more onerous. 

§ 331* Incorporators 

The parties applying for a charter must be competent 
persons of full age, and ordinarUy some proportion of them 
must be citizens of the state in which the application for 
charter is filed. Minors, firms, or corporations, and generally 
persons not able to contract, are not competent parties, though 
they may usuaUy hold stock after the corporation is formed. 
Persons acting in a representative capacity cannot act as such 
in incoiporating a company. The minimum number of ap- 
plicants is in most states three, though in some few states 
five are required. Each incorporator must ordinarily subscribe 
for one or more shares of stock and all must sign and 
acknowledge the application. 

i$$2. Name of Corporatioii 

Names like, or nearly like, those of corporations already 
rig^tfuUy doing business in the particular state may not be 
selected as the corporate name. In some states all corporate 
names must begin with "The** and end with "Company.'* In 
others the name must be followed by "Limited" or "Incor- 
porated." In many states, firms may become incorporated 
under the partnership name without change or addition of 
any kind. 



INCORPORATION 



393 



§ 333. Purposes 

The purposes for which a corporation is to be formed must 
be set forth in the application. They must be permitted by 
the laws of the particular state. Ordinary business corpora- 
tions are allowed much latitude in stating their purposes and 
are not usually confined to one business or line of activity. 
( See Chapter LI. ) 

§ 334- CapiUlization 

The capital stock of the proposed corporation must be 
specified in the application and may be changed thereafter 
only by amendment of the charter. (See § 349-) 

§ 335- Shares 

In most states of the Union the par value of shares of stock 
may be fixed by the incorporators at discretion. In some few 
states there are general restrictions, as in New York where 
the par value of the share must be not less than $5 nor more 
than $100. In New York and some other states shares may 
also be issued without any par value. • 

One hundred dollars is the most convenient and most 
generally adopted par value for shares of stock. (See § 349) 

§ 336. Location . 

A corporation must have its principal office in the state V 
in which it is incorporated. The location must usually be 
specified in the application for its charter. 

In the state of its incorporation the company is a "domes- 
tic" corporation. Elsewhere it is a "foreign" corporation. In 
its own state it has certain legal rights as an incident of mcor- 
poration. In other states it has no such rights except as a 
matter of courtesy or as may be granted there by legislation. 



I 



^^ CORPORATIONS 

§337- Buratioii 

In s^e states the duration of corporations is limited to 
«^e fixed maximum as twenty, thirty, or fifty years. In 
Zte™? ''°:!7' -'>««^ - -"Toration may ^limited to 
Sr^f^l''^ '^^ ^-"-* ^« P^-'-'^-o make its 

§ 338- Number of Directors 

The number of directors of the corporation must in most / 

aUowed by law is usuaUy three. (See §371.) ™™™"" 

§ 339' Classification of Stock 

Under die laws of most of the states, stock may be classi- 
^1 ""T T'\ '^' ™^*°'"^'^ classification is into 

sTt" r r '"? '"^ ^"°*'^^ ''^^^-' classification 
1«L ""T^ '^ non-voting stock. Sometimes stock is 

^^^ UseT ^^ "' '"' '^^'^ °"^ °' "-^ ^-- 

§340. Cumulative Voting 

§ 341- Execution of Certificate 

forJ^ "^Tl T"'^**^"' ''''^•"e been duly made out in con- 
Su'^iTdlr ' . "k °1*' ^^*^ °' incorporation, is sig^eS. 
ri L^ ^ '' ^ *' 'n<=OT>orators. It is then acknowl 

"C td r;e\t^7«tr^ ^^ ^^ acknowledgments 

§343. Filing and Recording 

Under the usual procedure, the duly executed application 
accompanied by the proper fees, is sent to the oflS o7Ae' 



IKCORPORATION 



395 



Secretary of State, while another copy is filed with the county 
clerk of the county in which the proposed corporation is to 
have its principal office. Each state has its own minor varia- 
tions in procedure, which will be found in its statute law. 

In New York the state fees must be sent to the State 
Treasurer. When these fees are received, the Treasurer certi- 
fies that fact to the Secretary of State, who wiU not file the 
charter until this certification is received. In New Jersey the 
application is filed with the county clerk first, and a copy 
certified by him is then filed with the Secretary of State. In 
some states, the application must receive the approval of the 
judge of a specified court before it will be filed. 

If the application for charter is in due shape and all fees 
are paid, it is accepted and filed as a matter of course. The 
application becomes, when filed, the charter of the corporation. 
The existence of the corporation dates from such filing. 

As the procedure for incorporation varies in each state, 
it is best to study the statutes and the forms prescribed in 
the reader's own state. In most states these statutes are 
published in a pamphlet and the blank forms are usually sent 
out on application to tiie Secretary of State. 

§343. De Facto Corporation 

Sometimes an attempted incorporation may fail and then 
a question may arise as to the liability of the members. The 
elements of a de facto corporation are: 

1. A general law under which the corporation could be 

legally formed. 

2. A bona fide attempt to comply with the provisions 

of that law. 

3. The exercise of corporate powers. 

When these elements exist the liability of members will 
be the same as if the incorporation had not been defective. 



i 






396 



CORPORATIONS 



me doctrine of rfe facto corporations is not recognized. ^ 

§344. Contracts Prior to Incorporation 

When contracts are enfprpH ;.,f« • 
formation nf o entered into in expectation of the 

poration. drpTds l^^Z' '/ *' 'T"*""" '^"^ °^ '"•=*'^- 
tract A C..K '^ "^'"'■^ ^"'^ condition of the con- 

tract. A subscription to stock wm.M k * • . 

l»y»««t had l«o, made lh.Z. M^l^ '"""»■«'. md H 
Other contracts, if clearly made on behalf nf A. 

tion. The promoters usually control the first mZ" ^ i 



INCORPORATION 



397 



I. 



Review Questions 



manufacturing o^rZ" "'^""'*'°" '"' "•"'- °* " 

3. Where mus7the prinj^'^!*^ /" ■"'=°n«^«'on ? 

it fixed? ''"""P^ °«^« °f « corporation be? How is 

4- How may stock be classified? 






5. How is the application for a charter executed? Where is it 

filed in your state? 

6. What is a de facto corporation? 

7. How many incorporators are required in your state to organize 

a business or a manufacturing corporation? 

8. Why are shares without par value desired? 

9. The promoters of a company before its incorporation employ 

an accountant to prepare the prospectus, which the company 
makes use of. May he recover for his services against the 

company ? 

When persons associate themselves together as a corporation 
and the corporation is defective or incomplete, what is their 
position as against the creditors of the corporation? 

What is the distinction between foreign and domestic corpora- 
tions ? 



IQ 



II. 






CHAPTER LI 

BY-LAWS* 
§345- Definition 

By-laws are the more permanent rules of corporate action 
as distinguished from motions and resolutions, which usually 
apply only to particular occasions and special matters 

A corporation is controlled: (i) by the corporation laws 

t ^ZT ".^ f J' J' ''°"''*=''^^' ^") ^y *^ provisions of j 
rts charter, and (3) by its by-laws, these three ranking in the' 

l^ZrZ t '° '"*°"'^- ^"'^ *"y ^y-'^* *^t does not 
accord wiA the statutes of the state and also with the provi- 
sions of the charter of the particular corporation is void 

„„!« r'f? ""^f "IkLOl^stockholdersand by them alone, 
feiSiS^. by cnarter provision, or by action of the 
stockholders tfieniselves, such power has been dele ' 



far^ in part to the dirertor. »f ..,, -^T^ntiog 

will n'^o^h? ff™?^ *''^^" °^ ^'^"^^ *° "^' "'"t^Cts 
wdl not be effective against one who contracts with the cor- 
poration without knowledge of those by-laws. The officers 
tho.^, would make themselves liable to the corporation for 
any damage resulting from their breach of duty. 

S 346> Adoption 

A corporation is not compefled to adopt by-laws Its 

A reasonably complete set of by-laws is usuaDy adopted 
by the sto ckholders at their first meeting, and thei by-laws 

*F.r f.n> of l».|„fc Ke CK««er CVI. Fom 55. 



BY-LAWS 



399 



y 



are added to, amended, or repealed from time to time there- 
after as may be necessary. 

By-laws should be carefully drawn, properly adopted, and 
accurately recorded in the minute book of the corporation. 
They should provide fully for all the important details of 
corporate procedure, such as the issuance and transfer of 
stock, the meetings of the stockholders and directors, the 
election of directors and officers, the respective duties and 
responsibilities devolving upon these, and the care and manage- 
ment of the corporate property and finance. They should also 
include the more important provisions of the charter and of 
the statute law as far as applicable. This is done in order to 
provide a convenient and accessible memorandum of these 
provisions. Without this they might be overlooked or for- 
gotten. 

§ 347. Amendment 

The by-laws usually prescribe the method of their own 
repeal or amendment. Unless otherwise provided by statute, 
charter, or by proper provision in the by-laws themselves, these 
by-laws may always be repealed or amended, either in whole 
or in part, by a vQ?}'^'''^y ^^^^^ ^^ "^ gnnrnTn nf stnrkhnlHars at 
any rrpihr m-'-^-'-f , n*- ^^ ^"y T^'^if^l meeting duly called for 
th aTpurpos e. The directors have no power to repeal or amend 
by-laws under any circiunstances unless such power is ex- 
pressly given them by the laws of the state of incorporation, 
by the charter of the corporation, or by its by-laws. 

§ 348. Enforcement 

Direct penalties for the violation or non-observance of 
by-laws are sometimes provided. These usually take the form 
of fines. Such penalties are, as a rule, unsatisfactory and very 
difficult of enforcement. The smaller infractions are usually 
passed over, or recurrence is prevented by the substitution of 



y 



400 



CORPORATIONS 



more reliable officials at the next election. The more serious 
violations bring their own penalties in the legal liabilities and 
entanglements that necessarily follow. Corporate action taken 
in disregard of by-law provisions is, for that reason, not only 
illegal but may at times involve the directors and officers con- 
cerned in personal liabilities. 






Review Questions 

What are by-laws? How do by-laws rank as compared with 
other corporate regulations? Arc by-laws binding on people 
who do business with corporations? Give reasons for answer. 

Who adopt or amend by-laws in your state? If a corporation 
adopted a set of by-laws which provided that any amendment 
required a two-thirds vote, would a subsequent amendment 
by a majority be good? Give reason for answer. 

How are by-laws enforced? 



CHAPTER LII 



STOCK^ 



§349. Capital Stock 

The capitalization or capital stock of a corporation is the | ^ 
amount of stock as fixed by its charter which the corporation I 
is empowered to issue. This amount can be changed only 
by amendment of the charter. This capital stock is regarded 
as divided into equal shares, termed "shares of stock." When 
by purchase or otherwise a person acquires an interest in the 
capital stock, he becomes a stockholder in the corporation, and 
his interest is expressed in these shares of stock. 

The par or face value of shares of stock is fixed by the 
charter of the particular corporation, and, unless expressly 
limited by statute, may be placed at any amount desired by the 
incorporators. This par value can be changed only by charter 
amendment. One hundred dollars is the most common par 
value of shares. The number of shares owned by any in- 
dividual gives an accurate measure of his interest in the 
corporation. For instance, if a man ow^ns ten shares of the 
par value of $100 each in a corporation with a capitalization 
of $10,000, all of which is issued, he owns a total stock in- 
terest of one-tenth of the entire outstanding capital stock, and 
therefore has an undivided one-tenth interest in the entire / 
corporate property and business. 

The par value and the actual value of a share of stock 
may be very different. A hundred-dollar share of stock in a 
prosperous corporation will frequently be worth several times 



» For form of subscription list, stock certificate, and assignment of stock certificate, 
sec Chapter CVI, Forms 53, S7- 

401 



402 



CORPORATIONS 



I 



§350- Stock Certificates 

th. !!r?».'u "^f '''' ^'■' '''"''' ^' ^ convenient evidence of 
Ae stockholders' interests in a corporation, and every stock- 
holder whose stock is paid for has a right to such a certificate. 
TT^ese certificates state the number of shares owned, their par 
value, and usually any other material facts affecting the stock 
.n question, as. for instance, that it is full-paid, or that it is 
preferred stock. These certificates of stock are signed by the 
pres.dent and the secretary, or the president and the treJurer 

When properly issued, they are conclusive evidence of the 
ownership of the stock represented by them. 

The stock certificate, as already stated, is merely the evi- 
dence of ownership of stock and is not the stock itself. The 
stock of a corporation usually exists before stock certificates 
are issued at al . and may be bought and sold by proper entries 
on the corporate books. 

rata before ,t may be offered to outside investors. However 
a pnce may be fixed, not less than par, and if the stockholders 
tZTl "^ ?^f^!'^'y to take stock at that price in propor- 
tion to their holdmgs, and the offer is not accepted, the right 
IS lost, and the stock may be sold to others, at the advanced 
pnce. In some cases subscription scrip that can be sold to 
others IS issued to stockholders in proportion to their holdings 
Each share of stock usually entitles the owner of record 
to one vote in all proceedings of the stockholders, whether as- 
sembled in annual or special meeting. In most states bv 
proper charter provision the voting power of stock mav be 
restncted, or stock may be issued without voting power Pre- 



STOCK 



403 




ferred stock is very frequently so issued. Unless expressly 
denied or restricted hv proper provision, all stock has the usj ial 
votin pf power and this right may be exercised bv the ow 

record in nerson nr itciially hy prr|^y 

§ 35X. Capital Stock vs. Capital 

The "capital stock" or capitalization of a corporation 
should be very clearly distin guished f rom its "capita l." 

The capital stock is the total amount of stock the corpora-! 



tion is authorizedoy its charter to issue. This amount is fixed 
in the first place by the parties organizing the corporation — 
who are termed the incorporators — and, once accepted and 
authorized by the state, may be changed only by formal amend- 
ment of the charter. 

Th e capital , on the other hand, is the net actual amount of 
property owned by the corporation, that is, the excess of its 
assets over its liabilities. It is obvious that the value of these 
assets is liable to change with the fluctuations of the business or 
from other causes. The capital stock of the corporation and its 
capital, therefore, even though equal at first, may and fre- 
quently do differ greatly in amount. For instance, the capital 
stock of the Chemical Bank of New York City is $3,000,000 
while its capital is over $7,500,000. 

§352. Unissued and Issued Stock 

Unissued stock is not an asset of the company but is merely 
an unexercised right to issue stock when and as subscriptions 
for it are accepted. 

It usually r epresents excess capitalization. For instance, a 
corpOTStton organized to take over property worth $20,000 
might perhaps be capitalized at $25,000 with the idea of selling 
the excess stock at some future time to raise working capital. 

Issued and outstanding stock is stock which has been issued 
for cash, property, labor, services, or other values, or which 



I 



W 






404 



CORPORATIONS 



has been subscribed for and the subscriptions accepted by the 
company. Such stock is issued stock and the subscribers or 
purchasers are stockholders of the company, even though the 
actual certificates by which this stock is represented may not 
have been issued. 

Section 55 of the Stock Corporation Law in New York 
State provides that: 



No corporation shall issue cither stock or bonds except 
for money, labor done, or property actually received for the 
use and lawful purposes of such corporation. 




S353. Full-P; 



In most of the states, payment for stock may be made in 
anything of value. If the corporation has received the full 
face value for issued stock in cash or in any other form of 
payment permitted by law, such stock is termed full-paid, 
and its certificates should be marked "Full-Paid'* in order to 
indicate this fact. After stock has once been issued for full I 
value, it may be sold at less than par without involving the \ 
purchaser in any liability for the difference. 

If the corporation has not received the full face value for 
issued stock, the stock is but partly paid, and the immediate 
purchaser of, or subscriber to, such stock may usually be held 
liable for the amount necessary to render it full-paid. This I / 
liability may be enforced either by the corporation, or, in event l ^ 
of its insolvency, by any creditor of the corporation 

Stock certificates issued as full-paid when they are not 
full-paid will not protect stockholders, who knowingly sub- 
scribe for or buy such stock, from liability to creditors in 
case of insolvency. But an innocent purchaser for value who 
buys in the open market is not liable either to the corporation 
or its creditors. 

Watered stock is stock for which the corporation has not 



• 



STOCK 



405 



received full payment in cash, services, or property, ^^ater^ 
j;tnrk i<; usually created hv the issuance of stock in pa yment for 
property or services which have been overvalued; sometimes 
also it is created by the issue of stock insufficiently supported 
by the corporate property, as for instance, in cases of unwar- 
ranted stock dividends. 

§ 354. No Par Value Stock 

In some states, as in New York, stock may be issued having 
no par value. Its value is the market rate. Here the stoc k is 
full-paid when it is sold at whatever can be obtained for it in 
the market, and the re is no further liability. 

§355. Common Stock 

£!ommnn stock is the general or ordinary stock of a co r- 
por ation, with neither sp ecial privileges nor restrictions. If 
any portion of the stock is given iipecial piivileges ur'iestric- 
tions, that portion is thereby removed from the class of com- 
mon stock and the remainder constitutes common stock. Any 
statements made concerning stock, when the class is not speci- 
fied, are usually understood to apply to the common stock. 

Non-participating stock is stock sharing in ;^11 dividends 
but giving the owner no voting j ^ight. 



^ 



§356. Preferred Stock 

Preferred stock, as the term is usually employed, is that 
which has some preference a s to dividends or assets over other 
stock of the same corporation! This preference is usually 
secured to it by special provisions in the certificate of incor- 
poration, though in some states this may be attained by by-law 
provision. 

P referred stock may be eith er cumulative or non-cumu- 
lative as to dividends. Non-cumulative preterred stock must 



4o6 



CORPORATIONS 



receive its preferred dividend for the current year before any 
dividend is paid the common stock, but if in any year its 
dividend fails or is only partly paid it loses the unpaid amount. 
If the dividends on cumulative preferred stock are not paid 
in any year, or years, or are but partially paid, the amounts 
unpaid go over, or cumulate, and must be satisfied before 
the common stock receives anything. They remain a charge 
against the profits of the company until paid in full. 

It is us ually provided that preferred dividends shall be paid 
in fudSeyc^l I! lliL Luiuiuuu ^ibilk lec^eiygsany^vidend. Unless 
otherwise expressly providecl, after the preferred dividends are 
paid in any year, the common stock receives an equal dividend 
if the profits are suflScient, and both kinds of stock then share 
alike in any further dividends declared in that year. It is 
sometimes provided that, after the preference dividends are 
paid, the preferred stock shall share equally in all further 
profits with the common stock. Preferred stock is sometimes 
limited to its preferred dividend and does not participate atl 
all in any further dividends. 

It is often provided that in case of dissolution preferred 
stock shall be satisfied out of any assets of the company before 
the common stock receives anything. li this provision is no t 
made, either by statute or by charter, the preferred st ock m 
^a ry liquid ati on of the corporation will firs t receive any divi- 

"^^^1^ t^n ^"^ ^"^ therpafter will far^ ^ho oarn^ ac ;?^mmr^» 

-StQQk. 

Preferred dividends may be paid only from nrnfitg If 



there are no profits, Of if the prohts are needed for purposes 
of the business, the dividends to preferred stock are either 
passed entirely or cumulated until profits are made. Unlike 
a bond, preferred stock is not a debt or liability of the cor- 
poration. Its owners are stockholders and not creditors, and 
failure of dividends gives no cause of action against the com- 
pany or its directors. 



1/ 



I 



v^ 







STOCK 



407 



§357- Treasury Stock 

Treasury stock, in the better use of the term, is stock which 
has been issued for value and has by gift or purchase come 
back into the possession of the company. It diff ers from un- 
issued stock in the fact that it may be sold below par without 



\\ 



^ 



involving the purch ase r in any liability tor the uiip ard"tela 
So long as the treasury stock is held bv the company, it can 
neither vote nor draw dividends. 



§ 358. Lost Certificates 

A stockholder's rights are not affected by the loss or de- 
struction of his stock certificate. Its absence may involve 
much inconvenience, more particularly if the stock is to be 
sold. The directors may, in their discretion, provide for the 
issue of a duplicate subject to the by-laws, which usually 
provide that a bond must be required. 

If a certificate is lost the secretary of the company should 
be notified promptly, as otherwise the stock certificate might 
be presented under circumstances which would justify him in 
making any desired transfer. After notification he would 
make such a transfer only by direction of the board. 

§359. How Transferred 

Stock certificates usually have a blank form of transfer 
printed on the back. If this is simply signed, the stock may 
be transferred to anyone, and he will have a right to obtain a 
certificate made out to himself by surrendering the indorsed 
certificate to the corporation. If the name of the person to 
whom it is transferred is inserted, only that person has a right 
to the stock and to the new certificate. 

A Uniform Stock Transfer Act is now in force in four- 
teen states and territories and governs the method of trans- 
ferring stock and the rights of transferee and transferor. 
The states which have accepted this act are: 



\/ 





4oS 



CORPORATIONS 

Connecticut 

Illinois 

Louisiana 

Maryland 

Massachusetts 

Michigan 

New Jersey 

and the territory of Alaska 



New York 

Ohio 

Pennsylvania 

Rhode Island 

Tennessee 

Wisconsin 



Review Questions 



1. 



a. 



What determines the amount of stock a corporation may issue? 

What is the par value of stock? What is the actual value? 

What fixes the actual value? 
What is a stock certificate? If a "close" corporation, that is, 

a corporation with a small harmonious group of stockholders, 

decided not to issue certificates, what would be the efifect ? 

3. When the capital of a corporation is increased, what persons 

have a prior right to subscribe for the new stock, and in what 
proportions? May such right be made negotiable, and if so, 
how? 

4. What is the diflference between the "capital stock" and the 

"capital" of a corporation? 

5. For what kinds of property may a corporation under the laws 

of your state issue its capital stock in payment? Explain 
fully. How are directors liable if they allow subscribers to 
stock to pay some instalments with notes? 

6. Stock certificates are issued to the original subscribers bearing 

the printed words "fully paid and non-assessable," when in 
fact they were only partly paid for ; later the stock is sold and 
assigned to a purchaser without notice of the fact that it 
is not paid for in full. What remedy has a creditor or the 
corporation against the original subscriber and against the 
transferee? 

7. What is the object of "no par value stock"? 

8. What is common stock? Define non-participating stock. What 

is preferred stock? Is preferred stock a debt of the corpora- 



STOCK 



409 



; 



1 



tion? Why do investors object to non-cumulative preferred 

stock ? 
9. Have preferred shareholders a right to recover when dividend 

is earned but not declared ? In event of insolvency can a holder 

of preferred stock claim payment for par value before 

creditors ? 
Which is the safer investment, preferred or common stock? 

Why? 
Why is common stock sometimes more valuable than preferred 

stock ? 
What is treasury stock? How does it differ from unissued stock? 

13. If a stock certificate is lost, what should be done? 

14. How is stock transferred? 



10. 



II. 



12. 



I 



I 



• i 



CHAPTER LIII 

STOCKHOLDERS AND THEIR MEETINGS^ 

§ 3fio, Incorporators 

Incorporators arc the persons who sign the certificate of 
incorporation. They must usually be subscribers for stock and y^ 
later become stockholders. It is the incorporators who draw 
up the application and make the charter provisions. After the 
charter has been accepted, those who have subscribed for stock 
become stockholders and these elect the directors. [(See § 331. ) 

§ 361. What Constitutes a Stockholder 

The stockholders of a corporation are those who actually 
hold its stock, or who have subscribed for its stock and have 
had their subscriptions duly accepted by the corporation. A 
"stockholder of record" is one whose ownership of stock k \/ 
duly recorded upon the books of the corporation. 

When outstanding stock is purchased, the transfer must be 
entered on the books of the company before the purchaser be- 
comes a stockholder of record, entitled to vote, to share in 
dividends, and to receive a certificate of stock in his own name. 
Until that time he is the equitable owner of the 3tock, but is 
not known or recognized in any way as a stockholder. 

1 369. Rights of Stockholders 

The individual stockholder has but little part in the active ^ 
managhnent of the corporatioa 

The rights of holders of com mon storlc mav be stated as 
follows: 



STOCKHOLDERS AND THEIR MEETINGS 



411 



■ ror form of Binutcs of ■tockholderi' meetinct. ace Chapter CVII, Pons S9. 

410 



I. 



2. 



s- 



To be notified of, and to participate in, all stoc k- 
h olders* meeting s, in person or by proxy, and toCJ 
cast one vote for each share of stock held. 

To vote in the election of directors at the annual Q 
meeting each year, and upon ^"y arp**^^"^*""^ ^^ 
the by-laws or other general matters brought be - 
fore_tfieineeting. 

To share, in proportion to the amount of stoc k M) 
owned, in all dividen ds declared on the common 
stocjs^ /►-. 

In event of the dissolution of the corporation, to W 
sha re in like prop ortion in any ^frf^ft*' r<^rnajnin^ 
alter all the corporate debts and obligations have 
been jp aid. 

To inspect the corporate books and accounts. 



§ 



It should be said, however, that this last right has been 
so restricted in practice as to amount to little more than the 
right to inspect the list of holders of stock as shown by the 
stock ledger. 

The remedy of a stockholder denied access to the books 
would be by writ of mandamus. Theoretically, the holder of 
a single share may enfSrce this right of inspection, but prac- 
tically the courts would hesitate to act where the interest was 
small. To inspect the books of a large corporation is a serious 
interference with business and the courts would not allow 
inspection except for weighty reasons. 

Holders of preferred stock have the same rights, except as \ \ 
these may have been extended or restricted by the conditions | • 
under which the stock was issued. 

§ 363* Powers of Stockholders 

The powers of the stockholders may be summarized as 
follows: 







V 



\^ 



413 CORPORATIONS 

1. Adoption or amendment of by-laws. 

2. Election of directors. 

3. Amendment of the charter. (See § 329.) 
4* Dissolution of the company. 

5. Sale of the entire assets of the company. . 

6. The exercise of any specially conferred charter v 

powers. 

The board of directors is t he sole managing and controlling 
atitliuiil^ ot tnc corporatio n. The stockholders make the by- J 
laws by which the directors are controlled, and elect the direc- 
tors by whom the corporate affairs are conducted, but beyond 
this they do not interfere in any way with the transaction of 
the corporate business or the management of the corporate 
property. All this rests with the board. N or ran \\\e gtorV- 
holders act directly for the conx>ration . A contract signed by 
every stocWiolder would not be the contract of the corporation! 
and would not bind the corporation, unless also signed by its/ \/^ 
proper officers or otherwise formally accepted by its directors] 

i 364. Liabilities of Stockholders 

A stockholder is liable to the company or to its creditors 
for any instalments remaining unpaid upon stock subscribed 
for by him. He may also be liable to creditors on any stock 
held by him which is not full-paid. Should dividends be paid I -j 
from capital instead of from profits, stockholders are liable to I ' 
corporate creditors for any amount so received by them. 

Also stockholders of national banks and of most state 
banks and trust companies are held liable in case of the in- v^ 
solvency of their institutions, for an amount equal to their 
original subscriptions. 

As a rule, however, in the ordinary business corporation 
the holder of full-paid stock is in no danger of losing any- ^ 
thing more through corporate failure or insolvency than the 
amount he has actually invested in his stock. 



STOCKHOLDERS AND THEIR MEETINGS 



413 



§365. Stockholders' Meetings 

The annual meeting is usually the only regular meeting of 
stockholders. It mii<;t \^^ hej fl in thf gt;^t*> ^'" ^"^^i>^^ ^^^ ^«^"^- 
pnny i^ jpmrpri rgff^H, unlcss the laws of such state expressly 
provide otherwise, and it is usually required that this 
annual meeting be held in the pri ncipal office of the cor- ^ 

poration. 

^"Tx the annual npppttn^ the Hirprtors for the ensuing year _ 
a re electe d, the reports of the officers are presented, any amend- 
ments to the by-laws may be submitted and acted upon, and 
any affairs of the company requiring the action or attention of 
the stockholders may be presented for consideration. If any 
sweeping change in the business or policy of the company is 
desirable, it is usually authorized by action of the stockholders 
at this meeting. 

If action by the stockholders is necessary in the interim 
between the annual meetings, a special meeting may be called 
by resolution of the directors, or in any other way that the 
by-laws may prescribe or permit. This call is followed by a 
notice to the stockholders, giving the necessary details of the 
meeting which is to be held. In the case of a special meet- 
ing, both call and notice should state the purpose of the 
meeting. 



V 



§ 366. Quorum 

The quorum at stockholders' meetings should be prescribed 
in the by-laws. The usual provision requires the presence of 
a majority of the outstanding stock in order to transact busi- 
ness. When a quorum is present, a majority of this quorum ^ 
ha s powerj o^ decide any question that i<^ \^rcm^y\\ before the^ 
meeting, unless it should be a special matter requiring a two- / 3 
thirds or other larger vote to pass. Where it is not otherwise 
prescribed the common law rule is that those in attendance 
will constitute a quorum. 



414 



CORPORATIONS 



§367. Votings 

Only stockholders of record ^^r^ Ar.»;»i^ |^ ^.^^-p ^^^^^^^^^| 
^d^pecial meetings of the stockholde rs. Rarh i,..^ixv,xuci ui 
record is entitled to one vote for eacJi share of stock held in 
his name. That is, if five directors are to be elected, the holder 
of one share may cast one vote for each of these. The holder 
of ten shares may cast ten for each and so on. 

Under the cumulative system of voting, which is designed 
to secure for the minority a representation on the board, the 
holder of one share still casts one vote for each director to 
be elected, but he may cast all five votes — if five directors are 
to be elected — for any one candidate or may distribute them 
among the five as he sees fit. 

Voting at elections of directors is usually by ballot. 

§ 368. Voting Trusts 

It is frequently necessary or important that the agreed 
management of a corporation be preserved consecutively for a 
term of years. T his may be for the p rot ection of mino rity 
or sp ecial interests or other valid reasons^ In spch a case a 
votifiglrust— sometimes called a "stock ^ool"— is the usual ^ 
means by which this is secured. 

This arrangement provides that sufficient stock to insure 
the desired end be placed in the hands of trustees for a certain 
period of time with definite instructions as to the way in which 
this stock shall be voted. A voting trust applies only to the 
stock of a single corporation, and must be distinguished from 
the attempts which were made to combine a number of cor- 
porations under one trust management This latter system 
was used to form combinations in restraint of trade, and on 
that account has been prohibited. 

N£BJ&w4* and Mdiylaiid are the only states in the Union 
in which th e voting trust is e^^pr^^ggty c^ nrtinnrd b3r ctatutc, 
although in New jersey, Massachusetts, California, Alahama] 



K 






STOCKHOLDERS AND THEIR MEETINGS 



415 






and some other states the courts have rendered decisions favor- 
ing arrangements of this kind and intimating that where the 
trust was for a proper purpose and for a reasonable time, and 
did not contemplate any advantage from which other stock- 
holders of the same corporation were excluded, it was not 
contrary to any principle of law or equity. 

Any voting trust formed to promote a monopoly, or tc 
dominate the corporation in the interests of another corpora- 
tion, or to deprive other stockholders of their rightful powers, 
would undoubtedly be held illegal. 



§ 369. Proxies 

Any stockholder entitled to vote at a stockholders' meeting 
may usually give a proxy (a power of attorney) empowering 
some other party to attend stockholders* meetings as his rep- 
resentative and vote his stock in his stead. ( See Chapter CII, 
Forms 31, 33.) In New Y ork a proxy is go od for any^ 
definite peri od not exceeding eleven month s. In Pennsylvania a 
proxy IS not good after two months. A proxy-holder need 
not be a shareholder. The inspectors of election nave power 
to determme the genuineness of any proxy. 



I. 



2. 



Review Questions 

What constitutes a man a stockholder ? What rights have stock- 
holders ? 

If a stockholder were denied access to the books what could 
he do? Could the holder of a single share enforce inspection 
of the books? 

What is the managing authority of a corporation? What power 

. has a stockholder? What power have the stockholders? 

What right, if any, in your state, has a stockholder to demand 
a financial statement? Are stockholders in your state liable 
for wages of employees if the corporation becomes insolvent? 



1^ 



^ 



1! 



4i6 



CORPORATIONS 



5. If a stockholder owned more than one-half of the stock, could 

he bind the corporation by a contract? 

6. What are the liabilities of a stockholder ? What is the liability 

of a stockholder in a national bank? 

7. Where should the annual stockholders* meeting be held? What 

is the usual rule as to quorum? 

8. Explain the operation and advantage of cumulative voting? 

9. What is a voting trust ? What can voting trusts do legally ? 

10, Must a proxy-holder be a stockholder? 

11. When does a proxy which does not specify period, become in 

your state invalid? 
la. Who has authority to determine the genuineness of proxies? 






CHAPTER LIV 

DIRECTORS AND OFFICERS* 

§ 370. Status and Functions of Directors 

The board of direcl;or<; elected bv the stockholders, has 
the entire management of the corporate affai rs" 



The directors of a corporation are held to be its agents, 
and, in a measure, trustees for the stockholders. They are' 
responsible for its proper management. 

§37'- Number and Authority 

In most of the states there must be at least three directo rs. 
The maximum number is not usually designated. For all 
ordinary corporations a small board is most convenient, and 
as a rule most effective. 

When the board is unwieldy or difficult to assemble, the 
actual administration of the corporate affairs is usually dele- 
gated to an executive committee composed of from three to 
^vt members of the board. 

The board elects the corporate officers, appoints such other 
agents as may be necessary, and has entire charge of the prop- 
erty, interests, business, and transactions of the company. The 
board of directors is the embodied corporate authoritv. 

The directors can only act collectively and in a regular 
meeting or m a auly assembled special meeting. Tsingle 
director, unless autnori zed thereto by resolution of the board, 
or specially empowered in some other way, has no standing in 
corporate matters above that of any other stockholder. 

* For forms of calls, notices, minutes, etc., of directors' meetings, see Chapter 
CVII, Forms 58, 60, 62, 65. 



11 



4l8 CORPORATIONS 

S 373. Liabilitks 

Directors are liable In the same manner as trustees f or any 
wrongdoing ; also tor any neglect that results in loss to the 
corporation. For instance, they are liable if they issue stock V 
as full-paid which is not full-paid, or pay dividends out of the \ 
capital of the company when there are no profits, or otherwise^^-^ 
abuse their power. 

Contracts between directors and the corporation are gener- 
ally lipid by tht couits lu be luidabk but aro prooumpti- yg l y 
valid. T hey may be voided by the corporation if any element 
of unfairness is involved. Contracts of this kind will alwnvs 1 1 
nowever, be more carefully scrutinized than ordinary con- 11 ^y 
tracts, and their validity may rest on the circumstances under \\ 
which the contract was made. 

In a case of a threatened breach of trust by the directors 
or officers of a corporation, an injunction may be asked by a 
stockholder or stockholders to prevent this and the stock- 
holder's rights in this respect are not affected by the amount 
of his holdings. The same action may be taken by a director 
to remedy the breaches of his codirectors. 

Creditors are not usually given any rights to interfere in \j 
the management of a corporation until they have obtained l/i^ 
judgment and had an execution returned unsatisfied. fi 

"The creditors of a corporation have no right, either at 
law or equity, merely because they are creditors, to interfere 
in the management, or to go into a court of equity to restrain 
it from making contracts or disposing of property, unless 
there is fraud or breach of trust to give the court of equity 
jurisdiction.** * 

A rorpnratinn where it is be ing pressed for payment of 
debts may make an assignment for the benefit of creditors. 



* Wither ▼. 



c, .**'r''V.-^?[°?r'',,*' ^^^V ^^ ^ ?'Pw ^5. Thomas ▼. Sweet, 37 Kan. 183. 

Stewart ▼. Lehigh Valley R. R, Co., 38 N. J. L. 55. Tompkins, Summary of Law of 
rnrate Corporations.. 



DIRECTORS AND OFFICERS 



419 



§373. Qualifications 

Most of the states req uir e that directors <i^?^11 hp stock- T^) 
h olders of the company ; also, us ually, that one member of^ 
the boar d shall be a resident ojJ hejtate_oL-A nr.orporatlo nr 
In some of the states the stockholding requirement may be 
waived by provision in the charter or by-laws. 



§ 374- Vacancies and Removal of Directors 

A board of directors may continue to act though there be 
vacancies, provided sufficient members remain and are present 
to make up a quorum. Varnnries should, however, be filled 
as the v occur, and authority to do this should be conferred 
on'"3ieboard by the by-laws. The board does not possess this 
power unless it is specifically given. 

Directors c annot be removed, either by the other director s 
or By the stockholders, unless such power of removal is ex- 
pressly given by the certificate of incorporation, the by-laws, 
o niie stall ili'^ t>f Lhe sUle. -— 




§ 375. Regular Meetings 

The times and places for regular meetings of the directors 
are "fixed by the by-laws. Monthly meetmgs are generally' 
prescribed. In a small company one regular meeting a year 



may suffice. Should action of the board prove necessary in 
the interim, special meetings may be readily called, or be held 
by consent whenever the occasion arises. 



ix^ 



§ 376. Special Meetings 

The bv-laws should clearly prescribe th ^ nnt^\hnA hy yihlrh 
special meetin gs of the board are to be calle d. Usually it is 
^ovided that the pre sident or two or more of the directo rs 
ffi ay call such m eetings. The call must be followed by a notice 
to each director. Calls for special meetings must specify the 



410 



CORPORATIONS 



time, the place, and the business to be transacted, these details 
must be repeated in the notice, and no other business than that 
so specified may be transacted at that meeting. 

§ 377. Quorum 

A majority of th e w hole board is usually necessary to con- 
st!fute 3j [|UQrum ! A majority of the prescribed quorum de- 
cidcslheaction of the board. Unless regulated by statute, the 
charter or by-laws may prescribe the number necessary to form 
a quorum. 

Directors cannot give proxies authorizing others to rep- *^^ 
resent them and vote for them at directors' meetings. Thc*^ 
directors occupy a position of trust and they cannot as in- 
dividuals delegate to others the trust vested in them. 

§ 378. Officers 

Ti^|> t^€>r/l i>«i«i n/^ rttily fhrr^t^^h ftlA nflf^ffrfr and agCtttS 

whirf| if appninf«i Usually the clcctiou of officers is held at J 
the first board meeting in each year after the election of the J 
new directors. In this way the new3irectors may elect their 
own officers and thereby secure an official staff in harmony 
with their views and policy. The usual executive officers of 
a corporation arc a president, vice-president, treasurer, and 
secretary. Two offices may be held by the same person if 
the duties are not incompatible and if the by-laws permit. 

The president and vice-president, as presiding officers ^ 
the board, should be chosen from its membership. 

If a chairman of the board exists, that official presides at 
aU meetings of the board. In this case the gener al rule tha t 
♦l^#>jr<M|iapnt must he a member ot tne Doard is not so Im- 
p erative. If, however, the president is to be the chief execu- 
Sveof the company, he must almost of necessity be present! 
at meetings of the directors, participate in their discussions 
and deliberations, and should therefore be a member of the] 



1 



[ 



I 



DIRECTORS AND OFFICERS 



421 



board. Save as to these, the officers need not be selected from 
the board. 

The officers of the company carry out the instructions of 
the board, and have no independent powers or authority out- 
side the routine duties assigned them by the by-laws or by the 
statutes. 



1^ 




§ 379. Salaries , 

Unless it is specified that officers are to receive salaries , j^j^^^-r:? 
they are n ot, as a rule, entitled to charge for their official ^ 
services . ^Neither is it ordinarily legal for the directors to /iuv 
vot e compensation for such officiaTservices after thevl are 
performed. To avoid misunderstanding, however, the condi- 
tions, whatever they may be, should be clearly stated in the 
by-laws — ^that the officers of the corporation shall receive no 
salaries, or that the officers shall receive only such compensa- 
tion for their services as the board may designate at the time 
of their appointment, or that the officers shall receive the 
salaries specified in the by-laws. The whole matter is one 
to be adjusted from a business standpoint, and much trouble 
is likely to be saved by ajiefinite arrang^ement. 

If, however, an officer is neither stockholder nor director 
of the company and stands in no relation which would make 
it to his interest to serve without compensation, there will 

b e a prima facie obligation to pay him^ " 

Officers who are also directors cannot vote salaries to them- 
selveTeven diough they are also holders of a majoritv of the 



. • 



stock. B ut an officer who is also a st ockholder and a d irector 
ma ^ recover for services re ndered outside h is official duties if 
uch services are authorized by the directors^ 

§ 380. Vacancies and Removal of Officers 

TVin Hirprtnr*; have power to fill, for |b<> iinpy^pir^rl fp rm 

any vacancies that may occur among the officials of the cor- 



422 



CORPORATIONS 



DIRECTORS AND OFFICERS 



423 



poratiofii Officers cannot be removed at the pleasure of tKe 

or statute laW pvc j h? 
this power. 




1^ 



§381. Dividends 

The matter of declaring dividends, the time when they arei \ 
to be declared, and the amount rest in the discretion of the! J 
board of directors. When a dividend is once puh jjrl}^ tl^rhrfd, 
it cannot b e rescinded. I f the resolution is adopted but is not 
kfSown, the declaration of the dividend can be nullified. 

Dividends may be legally declared only from surplus or net 
profits. If paid from the capital or obtained in any way that . 
will impair the capital of the company, the directorsjtender 
the mselves personallv liab le, and should the corp oration b e — — 
come ins£jHgnt the ;^rnf^""<'g ^ p^id may bff recovered from 
the directors or stockholders for the benefit of creditors. The 
^enefaTrulrTn-this country is that betore dividends canlSe 

^i rop c rly declared, any impairment of capitnl through bus inesy 
losses in previo us years or through depreciation must be first p 

^m ade goo 3^ In other words, di vidends mubt be decldied ou t ^^y y 
— oi -^^sttrphisZ L ,/^to 

Dividends are paid only to stockholders of record and must? 1 
be equal as between holders of the same class of stock. Par-\ \iy 
ticular stockholders may not be favored either in time or in ] I 
amount of payment. • 

§ 38a. Bank Deposits 

The moneys of a corporation should be deposited, in the 
name of the corporation, in some bank or trust company desig- 
nated, by the board of directors. Moneys so deposited should 
be drawn out only by checks, signed by the treasurer and 
countersigned by the president or by such other officers as may 
be properly authorized thereto. 
V 



§ 383. Execution of Contracts 

Corporate contracts must be authorized by resolution of the 
r ecioi b. In practice, however, this tule is soFnewhat 



relaxed. T he officers customa rily r"^^^ mntrart^s in minnr 
matt ers incident to their official duties without express au- 
thorization. If the officers have been habitually permitted to 
; conirkcl foT the corporation without specific authorization, 
such contracts, unless obviously in excess of the proper official 
powers, are binding on the corporation. 

§384. Corporate Seal 

The cor p ^ i-atf> ^^al } f^ fithfr proviH^^ ^^*- ^'*^ ^^^ ^y ^-^^"^ 
anri jc the refore adopted with the bv-laws . or is ad opted by, 
resolution of the boa rd of dire ctors. It should b ear the n ame 
.- ^ the com pany, the^ state of incorporation, and tne year in 
which the incorporation was effected. _ 



I. 
2. 

3- 
4. 



Review Questions 

Who IS responsible for the management of a corporation? 
What is the object of having an executive committee? What 

authority has an executive committee? 
What are the general powers of a board of directors? 
Who is responsible if dividends are paid illegally? 

5. May a person accept a present of shares in a company in con- 

sideration of his joining the board of directors? 

6. State generally who is entitled to file a bill to compel the 

officers and directors of a corporation to account for any 
breach of duty or breach of trust. 

7. A company's earnings for a year would enable it to declare a 

dividend of 10 per cent. The directors refuse to declare a 
dividend, deeming it better to use the profits in extending the 
business. Have shareholders who want the dividend any 
remedy at law? 
Is a director or a stockholder chargeable with knowledge of 
a corporation's business merely because he is a director or a 
stockholder ? 



a 



i 



424 



CORPORATIONS 



10. 

II. 



12. 



Are the executive officers of a corporation entitled to salaries? 

How can officers secure salaries? 
Can directors give proxies for directors' meetings? 
Has the treasurer of a corporation^ as such officer, any authority 

to bind the corporation by a contract for work, labor and 

services ? Explain. 
From what source should dividends be paid? May a dividend 

be legally declared if former losses have impaired the capital 

of the company? 



i: 



t 

I ; 
fii 



11 





i/(/t 3 



U 



%»" -.. 



1920 



i 



DiS^o 






^'■>'*-4-^*%^^Q''X-*fcH^ 








21Feb' 






Srv 



NEH 



^B 



^ 4 19S4 



^a 






/n 



5« 00l3t 



NOV 61930 



»,-■ tW!': 




Columbia ?Hmbers(ttp ^ 

inttieCttpof^lD|»ork 

LIBRARY 




School of Business 



Business Law 



A Working Manual of Every-day Law 



By 

THOMAS CONYNGTON 

Of the New York Bar; Author of " Corporate Organization 
and Management," " The Modern Corporation," etc. 



VOLUME II 




SECOND EDITION 



NEW YORK 

THE RONALD PRESS COMPANY 

1920 



Copyright, 1918, by 
Tbe Ronald Pkess Company 

Copyright. 1920, by 
The Ronald Press CoMPAWf 



AU Rights Reserved 

^ ij I St; 



TGIl 



M 



CONTENTS 



VOLUME II 



Part X — Real and Personal Property 

LV PROPERTY Rights 

§ 385. Origin of Property 

386. Rights to Personal Property 

387. Rights Classified 

LVI Real and Personal Property Distinguished 

§ 388. Personal Property Defined 

389. Real Property Defined 

390. Questionable Cases 

391. Fixtures 



427 



430 



LVII Title to Personal Property 

§392. Title 

393. Original Title 

394. Derived Title 

395. Accession 

396. Confusion 

397. Kinds of Ownership 

LVIII Transfer of Personal Property . , . 

§398. Gift 

399. Sale 

400. Chattel Mortgage 

401. Conditional &iles 

LIX Estates in Real Property .... 

{ 402. The Nature of Real Property 

403. Right to Real Property 

404. Estates in Real Property 

405. Remainders and Reversions 

406. Vested and Contingent Remainders 

407. Executory Devises 

408. Time Limit to Effect and Executory Devise 

409. Dower and Curtesy 

410. Homestead 

III 



433 



438 



443 



^ A 



IV 



Chapter 



CONTENTS 



lU: KfSLdes and Tenancies in Common 
413. Trusts 



Page 



IX Title to Real Property 

8414. Original Title 
415. Acquired Title 

Ua Transfer of Real Property . • . . • 
S 416. Conveyance of Real Property 

417. Warranty Deed 

418. Record of Deeds 

419. Restrictions in Deeds 

420. Searching Title ^^^ 

421. Mortgage of Real Property 

422. Foreclosure 

423. Kinds of Mortgages 

LXII Landlord and Tenant 

1 424. Lease of Real Property 
A^K Parties to a Lease , „ , 

^l Rights and Duties of a L^^^d 
I2T Rights and Duties of a Tenant 
4^8. Expediency of a Written Agreement 

Part XI— WiUs and Inheritance 
urni Distribution of Property of an Intestate 

1 420. Definitions 
430. Rules of the Common Law ^^ 
Si What Will Become of Real P^^y. 
SI; Whtt Will Become of Pei^nal Property 
433. Is It Wise to Make a Will? 

LXIV How TO Make a Will 

& AiA Who Can Make a Will , - - , . „ riiTiii 
* ^K R^tnSns on the Power of Making a Will 

iiS*. General Form for Wills 

i37. Kinds of WUls 

438. Executors 

4-10. Trustees 

J^o. Trust Estates 

Jti: K^Dispose of Real Pro^V 
1T% How to Dispose of Personal Property 

JS: mResidSnT Clause and Its Uses 

445. What to Do with the Will 

UCV How TO Change or to Revoke a Will . 

S 446. How to Change a Will 
447. How to Revoke a WiU 



452 



%3^ 



CONTENTS V 

Chapter Page 

LXVI Other Ways of Disposing of Property After 

Death . 504 

§ 448. Deeds of Trust 
449. Gifts in View of Death 



LXVII The Settlement of an Estate 

§ 450. If the Deceased Person Left a Will 
451- 
452. 



S06 



If the Deceased Person Did Not Leave a Will 
Settlement Without Administrator 



467 



475 



485 



50X 



LXVIII Duties of Executors and Administrators 

§ 453- The Procedure of Administration 

454. Inventory 

455. Advertising for Claims 

456. Paying Legacies 

457. Caring for Funds 

458. An Executor's Authority 

LXIX Questions Between Life Tenant and Remainderman 
§ 459. How Conflicting Rights Arise 

LXX Intermediate and Final Accounts .... 

§ 460. The Obligation Account 

461. Kinds of Accounts to be Filed 

462. Final Accounting 

463. Preparing Accounts 

LXXI Rights in Property When There Is no Will 

§ 464. In the Case of Real Property 

465. In the Case of Personal Property 

466. Rights of a Husband or a Wife 

467. What Creditors Must Do 

LXXII Rights in Property Left by Will .... 

§ 468. If Real Property Has Been Devised By Will 

469. If Personal Property Has Been Left By Will 

470. Contesting a Will 

Part XII— Personal Relations 

LXXIII Husband and Wife ....... 

§ 471. Persons Who May Marry 

472. What Constitutes a Marriage 

473. Personal Rights of Husband and Wife 

474. Rights of Husband and Wife in Each Other's 

Property 

475. Rights of Husband or Wife In Case the CM;her Is 

Injured 

476. Divorce 



5" 



S18 



$21 



SH 



528 



535 



vt 



CONTENTS 



CONTENTS 



Chapter 
LXXIV PA«ENT ^ C^ ^ „j p,,,„ i„ Relation to CtUd 

liQ What Duties and Rights May Be Ciaimea ny 

Adopted ChUdren 
480. Children as Criminals 

UCXV Guardian and Ward * * 

1 481. Personal Guardian 
482. Guardian of Property 

Part XIII— Suretyship 

LXXVI The Contract of Suretyship or or Guaranty . 

1483. Definition 

484. Nature of Contract 

485. Written Contract 

486. Parties 

487. Consideration 

488. DeUvery and Acceptance 

UCXVII Rights of Surety or Guarantor . . . • 

$489. Notice 

490. Defenses 

491. Reimbursement 

492. Subrogation 
4^3. Contribution 

494. Extension of Tune 

495. Discharge 



Page 
546 



* • 



Chapter 

LXXX Interest 



vu 

Page 
5«4 



SSI 



S9I 



557 



562 



§512. Interest 

513. Discount 

514. Usury 

515. Compound Interest 

516. Partial Payments 

Part XV — Bankruptcy 

LXXXI Assignment for the Benefit of Creditors 

§ 517. Introductory 

518. Rights of Debtors 

519. Rights of Creditors 

520. Void Assignments 

521. Rights and Duties of an Assignee 

522. Form of the Assignment 

523. Revocation of Assignment 

524. Insolvency 

LXXXII Bankruptcy Proceedings 598 

§ 525. Receivership 

526. Bankruptcy 

527. Voluntary Bankruptcy 

528. Involuntary Bankruptcy 

529. Persons Who May Bring Bankruptcy Proceedings 

530. Persons Who May Become Involuntary Bankrupts 



Part XIV— Debts and Interest 



LXXVIII 



Debts 

§ 496. Definitions 
S7. Evidences of Debt 
^. Open and Stated Accounts 

499. Receipts and Rel^ses 

500. Part Payment in Full Settlement 

501. Accord and Satisfaction 

502. The Appropriation of Payment 
5^; Equitable ^Jurisdiction m Actions 

Accounting 



569 



LXXXIII Bankruptcy Proceedings (Continued) . 

§ 531. How Bankruptcy Proceeding:*: Are Instituted 

532. The Referee 

533. Procedure 

534. Creditors 

535. Rights and Duties of Receiver 

536. Rights and Duties of Trustee 

537. Rights and Duties of Bankrupts in Bankruptcy 

Proceedings 

538. Prrferred Creditors 



604 



for an 



Lxxxrv 



LXXDC Enforcing Payment op Debts . ' ' ' .' 
|5«H- When the Creditor Has Some Secunty for 

505. Where^here Is No Security for the Ddlt 

506. Attempts to Defraud Cr©^ 

507. The Modem Theory of Credit 

508. liens 

509. Attachment 

510. Execution 

511. Garnishment 



S75 



Discharge in Bankruptcy 

§ 539- Discharge of a Bankrupt 
540. What Debts Remain Undischarged 



613 



Part XVI — Bailments and Common Carriers 



LXXXV Bailments 

1 541. What Is Meant by Bailment 

542. Kinds of Bailment 

543. Mandate and Deposit 

544. Commodatum or Loan 



619 



Vlll 



Chaptee 



CONTENTS 



|S4S. Pledge or Pawn 
S6 Hiring of a Chattel . m_«a*,«P» 

Sy. B^^ent for Custody. Services, or Transport 
548 The Contract of Bailment 
549. Property Rights 
?50. Ehities of a Bailee 
551. Dissolution of Bailment 



Pagk 



•=::* 



LXXXVI Common Carmers ...•••* 

S SS2. Common Carriers r«„^«. 

'?« The Lien of The Common Camo' 
sS The Termination of the Bailment 
C55 Interstate Commerce Commission 

«6. Bills of Lading 

«7 Carriers of Passengers 

558. T^hone and Telegraph Compames 

Part XVII-Patcnts. TradcMarks, and Copyrights 

LXXXVII Patents • ' * '. 

1 559- Constitutional Authonty 
560. Introductory . x><.*^f 
Kfii Who May Obtain a Patent 
Si' Wh^t Inventions are Patentable 
563. What Is Unpatentable 
?S. Procedure to Obtain Patent 
c6s Procedure in the Patent Office 

566. Interference Proceedings 

567. Pinal Decision 

568. Government Fees Mid Grant 
<69 Marking a Patented Artide 
cm Design Patents 

571. Foreign Patents 

572. Assignments and Licenses 

573. Join^ Inventors 

574. Infringements 
C7S. Official Pubhcation 
576. Practical Information 



629 



639 



CONTENTS 

Chapter 
LXXXIX Registration of Trade-Marks 

§ 585. The Federal Trade-Mark Law 

586. The Ten- Year Clause 

587. Who May Register a Trade-Mark 

588. Procedure for R^stration 

589. What Will Bar a Trade-Mark 

590. Opposition to Registration 

591. Amendments, Rejections, and Appeals 

592. Certificate of R^istration 

593. Assignments 

594. Foreign R^stration 

XC Trade-Names and Unfair Competition 

§ 595* Unfair Competition Defined 

596. Trade-Names 

597. Secondary Meaning 

598. Personal and Corporate Names 

599. Geographical Names 

600. Imitation of Packages 

601. Other Forms of Unfair Competition 

602. Price Cutting 



IX 

Page 
660 



666 



XCI Copyrights 

I 603. Definition 

604. Who May Obtain Copyright 

605. Subject Matter of Copyrights 

606. The First Step 

607. Subsequent Procedure 

608. Making Out the Application for Copyright 

609. The Affidavit 

610. The Fees 

611. The Books Deposited 

612. Time for Filing Copyright 

613. Renewals 

614. British Copyright 



Part XVIII— Taxation 



675 



UQCXVni Trade-Marks 



654 



* 57|: gSnTaw Trade-Marks 
So E^tial Elements o a Trade-Mark 

580. What May Not Be Used 

581. What Can Be Used 

ifa ^^SSS^N^t^ Wable Apart from 

Business 
584. Summary 



XCII Laying Taxes 

1 615. Who Has the Right to Lay Taxes 

616. Purposes for Which Tax May Be Laid 

617. Methods of Taxation 

618. Extent to Which Persons May Be Taxed 

XCIII Collecting Taxes 

§ 619. Assessment of Real Property 

620. Assessment of Personal Property • 

621. Payment of Taxes 

622. Taxation of Corporations 

623. The Federal Income Tax 



687 



693 



CONTENTS 

Part XIX— Arbitration 



Chaptek 
XCIV Arbitration and Law 



Page 
701 



I 



( 624. Advantages of Arbitration 

625. Objections to Arbitration 

626, Statutory Arbitration 
627 Agreement for Arbitration 

628. Withdrawal from Arbitration 

629. Hearings 

630. Signing the Award 

631. Enforcing the Award 

632. Setting Aside the Award 

Part XX— Law and Lawyers 

XCV Study of Law for Business Men 

1 633. Law Books for Study 
6^ Law Books for a Busy Mail 
635'. The Case Method of Legal Study 
636! Taking a Law Course 
*>37- Courses in Commercial Law 

XCVI Choosing a Lawyer .... 

638. The Legal Profession 

6w The Domination of Precedent 

6io'. The Conservatism of the Law 

641 Ethical Standards of the Bar 

642. The Criminal Lawyer 

613. Selecting a Lawyer 

644- Lawyers' Compensation 

XCVII Law as a Vocation . . • - • 
i 645. Necessity of the Work of a La^cr 
' 646. The Work of the Familv Lawyer 
647. Business and Public Life 
Ss. The Effect of Legal Trainmg 

649. The Dignity of the Prof ession 

650. Law as a Practical Vocation 

651. Succeeding in the Law 

652. Deceptive Statistics 

653. Practical Directions 

Part XXI— Forma 
XCVIII Drafting a Contract , 
I. The Contract as Drafted 



CONTENTS 



Chapter 



Page 



XCIX EviDENaNG an Instrument 744 

Form 

2. Agent's Signature 

3. Corporate Signatures to Letters 

4. Corporate Signature 

5. Testimonium Clause — Two Corporate Signatures 

6. Testimonium Clause — Corporate and Individual Sig- 

natures 

7. Attestation Clause 

8. Attestation Clause in a Will 

9. Acknowledgment of Individual Person 

10. Acknowledgment of Attorney 

11. Clerk's Authentication 

12. Affidavit 



711 



C Contract Forms 

Form 

13. Simple Contract 

14. Contract by Letter 
Unilateral Contracts 
Formal Contract 
Corporate Contract 
Assignment of Contract 
Assignment of Contract- 



757 



15. 
16. 

17- 

18. 

19- 



-Indorsement Form 



7x6 



CI Forms of Sales Contracts 



Form 
20. Memorandum of Sale 

Contract of Sale by Letters 
Conditional Sales Contract 
Bill of Sale— Personal 
Bill of Sale — Personal 



762 



21. 

22. 

23. 
24. 

25- 



Contract of Warranty 



. . 7«6 



739 



CII Agency Forms .... 

Form 

26. Appointment of Special Agent 

27. Appointment of General Agent 

28. Power of Attorney 

29. Power of Attorney — Corporate 

30. Revocation of Power of Attorney 

31. Proxy — Simple Form 

32. Proxy — Unlimited 

33. Revocation of Proxy 

cm Forms of Negotiable Instruments 

Form 

34. Check by Individual 

35. Corporate Check 

36. Corporate Indorsement of Check 

37. Voucher Check 

38. Note by Individual 

39. Corporate Note — ^by President 



767 



773 



xu 



CONTENTS 



CONTENTS 



Page 



Chapter 



^**"r'««vwftte Note— By Treasurer , 
t toP^ N^J^llateral Security 

I2. Sight Draft 
Tt. Bank Acceptance 
il. Trade AcceptMice 
J5. Certificate of Protest 

CIV Forms of Employment Contracts . • • 

Precontract of Employment-Simple Form 
I7. Contract of Employment 

CV Partnership Forms 

^S^Simple Articles of Partoership 
?, ^kles of CoparUiership 
52! Sundry Partnership Clauses 

CVI Corporate Organization Forms . . • • 
Form . 

S' |ffiS?Si\t-Common stock 
ft* A^^t of Stock Certificate 
f|* Certificate of Incorporation-New York 
57*. By-Laws-Simple Form 

CVII Forms for Corporate Meetings . . . • • 

S: SJSSlSolfelr M^S^of Directors . 
6%. Motions 

^S. gn^fil^'R^rSesignating Bank 
CVIII Miscellaneous Corporate Forms . • < 

^S%esi«iation of Director-Tentative 
fy ISKn of Director-Peremptory 
%' R^St of Committee on By-Laws 
%: T^r^r's Affidavit-Corporate Statement 

ax Real AND Personal Property Forms . . 

70. Chattel Mortgage 

11' ^Swith Full Covenants 
7.V Real Estate Mortgage 



Chapter 
CX Sundry Forms 



Xlll 

Page 
Sii 



. 781 



784 



Form 

74. General Release 

75. Will 

76. Bill of Lading 

77. Guaranty Contract 

78. Guaranty Contract by Letter 

79. Agreement for Arbitration 



Appendix 

Appendix A — Chart Showing Jurisdiction of State Courts 
B — ^A Professional Law Library . . . . 
C — Glossary 



821 
822 
826 



. 788 



797 



804 



807 



BUSINESS LAW 



PART X 



REAL AND PERSONAL PROPERTY 



) 



CHAPTER LV 



PROPERTY RIGHTS 



§385. Origin of Property 

The natural right to property arises either from occupancy 
or labor, A man settled on unclaimed land, cultivated it, and 
built a house on it, and it became his. Men caught wild 
animals and tamed them, and by so doing became their owners. 
After the first taking, the right to the particular property could 
be acquired by another person only by transfer, that is, by 
gift or sale, from the man who originally owned it. 

The other origin of the right to property is in labor. A 
man caught fish, killed game, made a war club, or raised 
crops ; and the law recognized his natural right to what he had 
acquired by his own labor. 

Other less defensible means of acquiring property have 
prevailed and the law has recognized the titles despite their 
wrongful origin. Much real property has at some time been 
taken from its original possessors by conquest. Title so ac- 
quired has passed from hand to hand, has been sold, or has 
been inherited, and now the law recognizes as good the title 
that had its origin in violence and robber>^ Other property 
rights originated in fraud and deceit, but human law cannot 
well dispossess the present occupants who, in most cases, have 
acquired title in good faith. 

§ 386. Rights to Personal Property 

Personal property is of two kinds, tangible (that which 
may be touched), such as goods, chattels, commodities, etc.; 
and intangible, for example, a copyright. Intangible personal 

427 



428 KEAL AND PERSONAL PROPERTY 

property may be either certain rights in real estate such as a 
LsV for a term of years, or a license to cross land, or nghte 
of action against oLr people, that is, rights to rn^ey^r 
property evidenced by bills, notes, stocks^^ bonds, etc AU 
rights of action are technically known as "choses m actmn^ 
m rights to trade-marks, patents, etc.. are other exampks 
of InlSgible personal property. All of these may be owned, 
sold, and transferred. 

§387. Rights Classified 

Property rights may be either present rights based on 
actual possession of the property at the time or they may 
be futu^ rights. If future rights are certam, *ey ^re ^T^ 
as vested rights; if they are dependent on a condition, they 
are called contingent rights. 

Vested Rights. Where a person has an absolute ngnt 
at the present time to property which he will receive ^ some 
time in the future, it is known as a vested right For in- 
stance, a man may die and leave his house and lot to his wife 
during her life, and to their son upon her deaA. The son 
will not be the absolute owner of the property until his 
mother's death; but his mother will surely die some day, and 
either he, or if he be dead, his heirs, are certam of obtaining 
the possession of the property then. So he is regarded as 
having an absolute or vested right to the property. 

Contingent Rights. But if it were not certam who would 
take the property until the time for taking it armed; or if 
the person is known but his taking the property depends on 
some future event, so that his right to the property is de- 
pendent on a condition, or several conditions, as the case may 
te, then the right is known in law as contingent. For in- 
stlnce. a man might leave his property to his wife for ife 
and to those of his children who might be living at her death^ 
U would be impossible to say just which children would get 



PROPERTY RIGHTS 



429 



the property until her death took place. The interest of each 
child would be contingent. 



I. 
2. 

3- 

4. 

5. 
6. 



Review Questions 

Why does one man have a better right to a particular piece of 

land than does another? 
Why does one man have a better ri§ht to the Hope diamond than 

does another? 
If a man dies, who then owns his property? Why? 
What is the difference betwen tangible and intangible personal 

property? What does intangible mean? 
What is the difference between present and future rights? 
What is the difference between vested rights and contingent 

rights? Explain fully. 



CHAPTER LVI 

REAL AND PERSONAL PROPERTY DIS- 
TINGUISHED 

§ 388. Personal Property Defined 

Personal property consists of tangible things of all sorts, 
such as grain, wool, sheep, cattle, cloth, tools, etc. It also 
consists of leases of real property and all rights in real prop- 
erty which are of less dignity (not less duration) tiian a 
Ufe estate. (See § 404-) I" this connection, it would be well 
to state that in legal estimation a lease or estate for any fixed 
time even for a thousand or two thousand years, is con- 
sidered of less dignity than a life estate. Any interest m re4 
property which is measured by years is regarded as personal 
property. The only exception to this is what are known as 

cstscmcnts C Sec § 4 ^ ^ • / 

Personal property includes goods and chattels and also 
what are legally termed "choses in action," that is, rights of 
action, or anything which would give one a right of action 
against another for money or property. A debt is a chose in 
action. A promissory note, a bill of exchange, a corporate 
bond, or a share of stock gives a similar right of action and 
is known as a chose in action. A right of action for damages 
to real property is a chose in action. A right of action for 
personal injuries is peculiar to the person injured and may not 
be assigned. It is therefore not regarded, strictly speaking, as 
a chose in action, though it is a property right belonging to 
the person who has a right to bring the action. 

Patents, trade-marks, and copyrights are also choses in 
action and thus are personal property. They are valuable 

430 



REAL AND PERSONAL PROPERTY DISTINGUISHED 43 1 

forms of property which give rights of action to protect from 
infringers, a man's invention^ the good-will of his business, 
or the reproduction of his intellectual and artistic productions. 

§ 389. Real Property Defined 

Real property, on the other hand, consists of: (i) land, 
or any estate in land which is to last for one's own life or 
that of another, and (2) what are known as easements. These 
last are rights to some profit or beneficial use which one may 
have in or over the estate of another. (See § 411.) 

§390. Questionable Cases 

Generally, it is easy enough to distinguish real from per- 
sonal property. The difficulty arises when one considers such 
things as growing trees, plants, etc., that are fastened to the 
soil itself. The law has decided that all plants that have 
to be planted every year and are produced by man's labor 
shall be considered personal property, even while they are still 
attached to the soil. (See § 402.) Trees while growing are 
real estate ; when severed by the owner they become personal 
property. 

§ 391. Fixtures 

Houses and buildings are regarded as part of the land and 
are real property. Every portion of a building, therefore, 
which cannot be removed without destroying or injuring the 
building is also part of the real estate. If machinery is built 
into a factory, it is part of the factory, and cannot be removed 
from it. On the other hand, gas and electric light fixtures 
which can be removed without any injury to a house or build- 
ing are regarded as personal property, and a tenant who puts 
them in may take them away with him when he leaves. If 
they are put in by the owner of the building, they become a 
part of the building and must not be removed by tenants. 



432 REAL AND PERSONAL PROPERTY 

When a tenant has put in machinery and improvements 
for the better conduct of his business, the courts will favor 
him as against the landlord. When the question comes up as 
between the buyer and the seller, the courts will favor the 

buyer. 

Movable articles which are absolutely necessary to the use 
of the building, such as keys, are also regarded by the law 
as part of the real estate. A fence is part of the real estate, 
and if posts have been cut and laid out for building or re- 
pairing a fence, they are considered to be already a part of it 
and are real estate. 



Review Questions 

1. What is personal property as distinguished from real property? 

2. What are choses in action? 

3. What kind of property is a trade-mark? 

4. What is real property? What is an easement? 

5. Is a fence real property? Are rose bushes real property? Ar-! 

potatoes in the ground real property? 
4 What are "fixtures"? How does the application of the rule differ 
when applied: (a) between seller and buyer of real estate, 
(b) between landlord and tenant? 



) 



CHAPTER LVII 

TITLE TO PERSONAL PROPERTY 

§ 392. Title 

Title means the right to property and it also signifies the 
means or channel by which ownership is acquired. The sub- 
ject has always had much interest for students and teachers 
of the law, because such a large proportion of the principles 
of the law relate to this subject. 

Title to land may be by inheritance or descent, by will, 
or devise, by gift or purchase, or sometimes by occupancy. 

Title to personal property may be by descent, by will, by 
gift, by purchase, or by increase of flocks and herds, by labor 
or manufacture, or by finding. 



§ 393. Original Title 

The origin of the right to personal property is in either 
occupancy or labor. A man has a right to take a wild animal 
or a fish, seaweed, or an5rthing still in a state of nature and 
which belongs to no one else. By the act of taking the article 
it becomes his, and the law will protect him in his right 

The right to property through labor may be of two sorts. 
Where a man works for another, he earns wages for his 
services. The wages which he receives are his property, but 
the results of his labor belong to the man who is paying for 
them. On the other hand, where a man not working for an- 
other, by his labor produces something, he has a right to what 
he has produced. For instance, where a man writes a book, 
invents a labor-saving device, designs a dress, or draws up 

433 



434 



REAL AND PERSONAL PROPERTY 



plans for a public building, the book, the device, the design, or 
the plans are his own property. 

In the same way, the right to property may be acquired 
through discovery. If a man should discover a buried treasure 
left behind by Captain Kidd or some other pirate, the treasure 
would become his. When lost property is found it belongs, 
of course, to the true owner if he can be discovered. If he 
cannot, the finder has a right to the property. The owner 
of lost or stolen property may reclaim such property from its 
possessor even if the latter, not knowing it had originally been 
stolen, paid a full price for it. 

Note: 

I. Never buy personal property where there is a doubt 
as to the seller's title. 

§d94. Derived Title 

Most of our rights to personal property nowadays, except 
those that come from our own labor, come to us by title derived 
from someone else. We either buy property or have it given 
to us by someone else. Our right to it ie then derived from 
the former owner. 

Property may be bequeathed by will, transferred by actual 
gift, or acquired for a consideration. Where the state gives 
the right to property to anyone, it is known as a grant. In 
England, all gold and silver mines belong to the king, and 
he grants them to whom he wishes. When a person dies with- 
out leaving a will, his personal property is distributed to such 
of his nearest relatives as are legally entitled to it Those 
who receive it in this way take title by descent. When personal 
property is left to anyone by will, the person receiving it takes 
it as a legacy and is called a legatee. 

Note: 

I. Generally, only an executor or administrator ap- 
pointed by the court has the right to sell personal 



TITLE TO PERSONAL PROPERTY 



435 



property belonging to the estate of a deceased 
person. 

§395. Accession 

Another way of acquiring title to personal property is by 
what is known as accession. 

Accession is the addition made to property, either by 
natural increase as in the case of flocks and herds, or by in- 
crease of its value through labor, or by annexation, as in the 
case of attaching fixtures to realty. The addition, whatever 
it may be, belongs to the owner of the principal piece of 
property, even though the material added may be of a great 
deal more value than the thing itself. A piece of machinery 
might be entirely rebuilt and would still belong to the original 
owner of the machinery. 

If A takes some of his own property and some of B*s inno- 
cently, through a mistake, and by his labor combines them into 
an entirely new article, the new article belongs to A, although 
B's property put into the new product was of a great deal 
more value. Even though the original property belonged en- 
tirely to B, if A has made an entirely new thing of it, the 
same law of possession holds true. For instance, if A should 
take some wood belonging to B and make it up into boxes or 
ladders, etc., the boxes or ladders would belong to A. Of 
course, he could be compelled to pay for the materials that 
did not belong to him. If, on the other hand, A knew that 
the property did not belong to him, the new article will, as a 
usual rule, belong to B who owned the property from which 
it was made. 

§ 396. Confusion 

Sometimes property belonging to two or more different 
people becomes mixed together so that it is impossible to 
distinguish it. This is called confusion of goods. If the con- 



43^ 



REAL AND PERSONAL PROPERTY 



TITLE TO PERSONAL PROPERTY 



437 



fusion happens by mistake, each party is entitled to a share 
as nearly equal to his original share as it is possible to estimate. 
If one of the parties deliberately brought about the confusion, 
he may secure what belongs to him only if he can clearly and 
unmistakably prove the amount to the satisfaction of the court. 
If he cannot, the whole belongs to the innocent party. 

§ 397. Kinds of Ownership 

Personal property may be owned entirely by one person, 
or it may be owned by two or more persons jointly or in 
common. Ownership may be absolute, or some conditions may 

be attached to it 

Ownership in Common, A right to property in common 
means that the two or more owners enjoy the use of the 
property together during the lifetime of all of them; and upon 
the death of any one of them, those who the law says are 
entitled to his estate have a right to come in and enjoy his 
share of the property together with the surviving owners. If 
they wish at any time to divide their shares, they may either 
agree among themselves to do so or resort to an action at law 
to have it divided for them. 

Joint Ownership, When the ownership is joint, both of 
the persons enjoy the property so long as both remain living, 
and upon the death of either the whole property goes to the 
survivor. This right of the survivor to take the whole prop- 
erty is peculiar to joint ownership and differentiates it from 
ownership in common. On this account personal property is 

rarely held jointly. 

Partnership Ownership, Partners do not hold any per- 
sonal property in common. Any personal property used in the 
firm business is partnership property and is owned by the 
firm. (See Chapter XLV, "Partnership Property.") 

Absolute or Conditional Ownership, The usual ownership 
of personal property is absolute. Personal property could be 



bequeathed, given, or sold to a person on condition, or the 
ownership could be qualified. (See § 95, "Conditional Sales.") 

Note: 

I. It is rarely that any common or joint ownership of 
personal property is satisfactory to both parties. 
The sooner, in such cases, the property is divided 
or sold or one party is bought out, the better the 
prospect for continued friendship. 



I. 



2. 



Review Questions 

What is meant by title? Why is the subject important in law? 

How may title to land be acquired ? How can title to personal 

property be acquired? 
H a man is paid $5 for a day's labor and the result of his labor 

is worth $10, to whom does the surplus value belong? Why? 

3. If A buys an automobile and later B proves that it was stolen 

from him, to whom does it belong? 

4. After a man dies, to what extent and for how long should the 

law allow him control over the personal property he owned 
when alive? 

5. What is acquisition by accession? 

6. What is the rule in case of confusion of property? 

7. What is ownership in common? 

8. What is joint ownership? 

9. When is estate or ownership in chattels personal not absolute? 
10. When is a finder entitled to keep lost property? 



TJtANSFER OF PERSONAL PROPERTY 



439 



I 



:ili 



M 



ml 



I 



i| 



mil 

t 



CHAPTER LVIII 
TRANSFER OF PERSONAL PROPERTY 

§398. Gift 

The person who has the right or title to personal property 
has also a right to transfer it to anyone else. He may give it 
away if he wishes to do so. He may do this either by actually 
handing over the property, or by making out a bill of sale 
for it and handing that over to the person to whom he wants 
to give it If the property is not easy to handle, it is not 
always necessary actually to hand over the property itself. 
Handing a person the keys to a building, or a savings bank 
book, or a bill of lading is equivalent to giving the person 
what is in the building, or the money on deposit, or the goods 
called for by the bill of lading. The giving of any means by 
which the recipient can obtain the property is sufficient. 

Gifts made causa mortis, that is, to take effect in case of 
the giver's death, are treated later in § 449. 



Note: 



When a gift is made, the fact should be clearly un- 
derstood by both parties. 



§ 399. Sale 

The sale of personal property is a most important subject 
and has been treated at length in Part III of this work. 

§ 400. Chattel Mortgage 

Personal property may be mortgaged as well as real estate. 
A chattel mortgage is, in effect, the sale of a chattel with the 

438 



condition that if a debt or other obligation is paid by the party 
who makes the mortgage, the sale shall be void and the title 
shall return to the party who made the mortgage. Such a 
conditional transfer is often made to secure a debt or loan. It 
is usual for the party who makes the mortgage, called the 
mortgagor, to retain possession of the property, and in order 
to protect the title of the person to whom the mortgage is 
made, it must be recorded in the usual office of registry for 
the county. The object of this record is to give notice to other 
people that the property is mortgaged. Unless this record is 
made, the person to whom it was mortgaged could not claim 
his rights in the property if it were sold again to an innocent 
third party who did not know of the mortgage. A chattel 
mortgage is good usually for one year, or other period stated 
in the local statute, but may be renewed when about to expire. 

A pledge of personal property is the transfer of the actual 
chattel as security for a debt or obligation. A chattel mortgage 
saves the necessity of this actual transfer of the property and 
permits the mortgagor to have the use of the property at the 
same time that it serves as security for the loan. Any personal 
property that is actually in existence and is owned by the 
mortgagor at the time the mortgage is made can be mortgaged. 
A growing crop, an automobile, household furniture, or a 
stock of merchandise can be mortgaged. 

Chattel mortgages are invariably in writing and must be 
recorded in order to give notice to the public. Many times a 
chattel mortgage is made by giving an absolute bill of sale 
with a clause providing that it shall become null and void 
after the debt secured by the mortgage is paid. The property 
must be described so closely that third parties can identify it 
The object of the mortgage is to give notice to third parties 
of its existence and this could not be done unless the descrip- 
tion were sufficiently accurate to identify the property. 

The object of the chattel mortgage is to secure a debt or 



ffln 



440 REAL AND PERSONAL PROPERTY 

Other obligation. Hence, the mortgagee's title to the property 
does not become absolute unless he forecloses the mortgage. 
It is usual to provide in the mortgage that if the debt is not 
paid the mortgagee may sell the property. If he does not sell, 
the mortgagor has a right to pay the debt and mterest and 
redeem his property. Stocks of goods are often mortgaged 
and in such case it is understood that the mortgagor niay con- 
tinue to sell from them and keep the stock replem shed and 
apply the profits to paying off the mortgage debt. ( See Chap- 
ter CIX, Form 71.) 

§401. Conditional Sales 

The difference between a chattel mortgage and a condi- 
tional sale is as follows: 

1 . The party holding and owning the personal property 

makes a chattel mortgage to secure the due pay- 
ment of a loan or other obligation, and^he keeps 
the property. The mortgagee has a right to fore- 
close in case of default. 

2. The party who makes a conditional sale sells the 

chattel and transfers the chattel over to the pur- 
chaser. (See § 400.) The vendor has a right 
to repossess in case of default 

Mo tcs ' 

I. A chattel mortgage must be in writing and must 

be recorded. 
• 2. A chattel mortgage must conform to the local law. 



TRANSFER OF PERSONAL PROPERTY 



I. 



2. 



Review Questions 

What IS a gift? Can a promise to make a gift be enforced? 

Can a gift be recovered if once made? 
How is the title to personal property transferred? When sale 

of merchandise is made, when does title pass? 



441 



3. What is the object of a chattel mortgage? What is the procedure 

in your state as to chattel mortgages? 

4. A gives B a chattel mortgage on a Marmon car. It is filed in 

Westchester where A lives. A takes the car over into Con- 
necticut, and sells it to C who lives there. Can B enforce 
his right under the mortgage ? 

5. How does a chattel mortgage differ from a conditional sale with 

a right to possess? 

6. What must the holder of a chattel mortgage do, in case of default 

in repayment, to make his title good ? 



ESTATES IN REAL PROPERTY 



443 



CHAPTER LIX 

ESTATES IN REAL PROPERTY 

§ 40a. The Nature of Real Property 

By real property is meant land and anything permanently 

attached to it. ^^^ nf the land 

Buildings and fences are regarded as part of Ae land 

though they n,ay become P^-"tin'Z2h gl oTthe^! 
the land severs them from it. Thmgs which grow 
selves or which remain year after year, such as trees, perennial 
pLs. etc.. are regarded as part of the ^^^^^^^^ ^ ^^^ 
remain attached to it. but after they are cut d«J" *ey ^H^cc^m^^^ 
personal property. The same is true of ice. stone etc. . after 
U is cut or quarried, it becomes personal property. 

Crops which have to be planted every year and wh.di a e 
^erefo e the fruits of labor Jther •;;-nhe ^nd ^^ - 

kss Tey have been gathered before he is required to give up 

'^' The right to land includes everything underneath it to the 
center of the earth except such minerals as the government 
Sy claim. In some countries the government has a ^^^^^ 

the gold, silver, and more ^^^''^^\'^''''^''^\2^ 
property also includes the air above the property. Before the 
dlTof flying machines, the right to the air was neither en- 
forced nor questioned, but it is very doubtful whether a man 

442 



could prosecute an aviator for trespass if he flew over his 
property. At any rate the owner would have to prove dam- 
ages. 

In studying the legal aspects of the ownership of land, 
it is necessary to distinguish: 



I. 

2. 



The property itself. This may be, for purposes of 
illustration, an apartment house. 

The estate in the property. An estate in real prop- 
erty is the interest which the person in pos- 
session holds. Several persons may hold different 
estates simultaneously; for example, there may be 
the following estates in an apartment house: 

(a) An estate in fee simple held by an owner 

who may have leased the land for 99 
years reserving a ground rent. 

(b) A long-term lease held for 99 years by a 

lessee who may have put up the building 
and leased it to many tenants, 
(c) Many short-term leases held by the sub- 
tenants. All of these parties have estates 
or interests in the property at the same 
time. 
The title to real property. This is not the property 
and is not the estate in the property, but the 
means by which possession was acquired and is 
held. For instance, in the case of the apartment 
house: 

(a) The owner who receives the ground rent took 

title by will, inheritance, or deed. 

(b) The party who put up the building took title 

by a lease for 99 years. 

(c) The tenants take title to their several apart- 

ments by short-term leases. 



Jk M Jl... 

■fit 



REAL AND PERSONAL PROPERTY 



§ 403. Right to Real Property 

Under certain established rules, land or real foperty may 
be held or owned by private citizens. It may be bought, it 
may be inherited or transmitted by will. If one can occupy 
unclaimed land long enough and escape dispossession by some- 
one who advances a prior claim, he can stiU get a title by 
occupancy. It is now recognized, however, that the nght of 
the owner is always subject to certain rights possessed by his 
neighbors and the public. A man cannot keep a pigsty or 
nin a glue factory on his premises in the midst of .cr^^^^ 
city In some cities there is a limitation on the height to 
which buildings may be erected. Also there exists what is 
known as the power of "eminent domain," that is, the power 
inherent in the government to take private property for the 
use and benefit of all, as in the building of roads or railways 
In such cases, the owner is compensated, but he cannot prevent 
the action of the government. Finally, the state has the power 
to tax, and may some day carry this to such an extent as to 
take away the entire private value of the land. 

§404. Estates in Real Property 

A person may own real property outright. This is termed 
an "estate in fee simple." Or he may possess the right to it 
for his own life or that of another. This last is called an 
estate for life." Either of these estates in fee simple or for 
Ufe is regarded as real property. If a man had a right to a 
piece of land "as long as A or B or either of them shall hve 
L would have a life estate for two lives. These are called 
"freehold estates" and at common law were held to be of 
greater dignity than an estate for years. Any other right 
to the possession of land is regarded as personal property, 
even though it may be a lease for a term of years much longer 

than anyone's life. . t t. 

The holder of a life estate is bound to make such repairs 



ESTATES IN REAL PROPERTY 



445 



as are necessary to prevent the property from falling into 
decay, but he is not bound to make improvements, or replace 
buildings destroyed through no fault of his, or pay the prin- 
cipal of any incumbrance, though he must pay the interest. 
On the other hand, he must do nothing to waste the estate, 
such as stripping it of timber or opening new mines upon it, 
though he may work opened mines and cut a moderate amount 
of timber. 

§405. Remainders and Reversions 

When the life estate or life estates end, the final ownership 
of the property must either be given to someone else or revert 
to the original owner or his heirs. If the estate that is left is 
given to someone else, it is called "an estate in remainder"; 
if it comes back to the original owner, it is called a "reversion." 

When the original owner is dead, the reversion comes back 
to his heirs. There may be remainders and reversions even 
after property has been leased for many years. 

Remainders and reversions involve the absolute ownership 
of property. 

§406. Vested and Contingent Remainders 

If the person who is to take the remainder after one or 
more life estates is certain, and the fact that either he or his 
estate will get it finally is also certain, it is known as a "vested 
remainder." Although he may never live to enjoy the prop- 
erty, his right is certain, and if he dies, his heirs will inherit. 

If, on the other hand, the person who is to take the re- 
mainder is not certain but can only be known later; or if the 
remainder is left to a person who is certain, but on a condition 
which may never happen, the remainder is contingent. For 
example, a man might leave property to his son for life and 
after that to his grandchildren, although he had no grand- 
children at the time of making his will; in such a case the 



^6 KEAL AND PERSONAL PROPERTY 

u «— fr. ^^l^ef the remainder would not 
person or persons who are to take "»«/«"* , . . 

be certain, but if any were afterwards bom they ^ouW have 
De ccridui, u 1. , nr ViP tnipht leave the remainder to 

a right to the property. Or he migni ^^« " , . . 

such of his grandchildren as were hvmg at his son s death 
:^?it wodd'be uncertain, until his son's death, which of his 
grandchildren would get the property. ♦?,. nrnnertv 

On the other hand, the person who is to take the prope J^ 
miehTbe perfectly certain, but the event might be contingent. 
S for taSnce. if a man should leave property to his nephew 
Sr Hfe^n.; remainder to his niece if she were then hv.ng^ 
R is tiin who his niece is. but it is uncertain whether she 
will Uve to get the property. 

8407. Executory Devises 

An executory devise is an estate in land directed to take 
effect in^rtLre. without the ^--'^ P^^^, ;:^;;^ 
i„„„ediate estate. Strictly a man cannot t'^^^^f °P^^ 
Wmeans of a deed which is to take effect at some future 
toe The title to the property passes when the deed is de- 
Wred -if the deed is not delivered, it is no deed at all. Such 
Sr'e ^ate could be created only by deeding the property 
to a trustee to hold untU the time appointed for the future 
iLT-vest." In such case the future estate would be an 
estate in remainder and not an executory devise. 

Burhe may leave it by wUl in this way. mthout an in- 
. J^HJ^te estate provided that the future time at which the 
Stte ?o^rty is to "vest." or in other words become 
abilute in the^son to whom it is given, is not delayed 
tter than the 'law permits. Such a bequest .s termed an 

"executory devise." 



ESTATES IN REAL PROPERTY 



447 



8408 Time Limit to Effect an Executory Devise 

The legal limit for an executory devise to take effect .s 
usJuy vvithin the time measured by the life or the lives of 



persons in existence at the time the will was made. For in- 
stance, a man might leave property to his infant son to be his 
on the death of three other persons then living. The title of 
the property will then vest within the period of three lives. 

In England, a man named Thelluson left his property tied 
up for a long period, the income to be added to the principal 
and the interest compounded. At the end of the period the 
entire fortune, which would then amount to an enormous sum, 
was to be delivered to his heir in the direct line, which would 
make him the richest man in all England. The heirs who were 
left out took the matter to the courts and the highest legal 
authority in England, the House of Lords, decided that the 
arrangement was contrary to public policy and should not be 
carried out. The principle established in this case has pre- 
vailed both in England and in this country and no property 
can be tied up in any way except for the limited period pre- 
scribed by the law. This is known as the law of perpetuity. 

§ 409. Dower and Curtesy 

At common law a wife was entitled upon the death of her 
husband to a life estate in one-third of any real property 
which he owned during their marriage. This right was known 
as "dower." In consequence, when a married man sells real 
estate, it is necessary that his wife join with him in the deed 
and that she expressly release her dower right. 

If there was a child born alive, the husband was entitled 
upon the death of the wife to a life estate, not in one-third 
but in the whole of the wife's real property. This right was 
known as "curtesy." 

Many states have abolished both dower and curtesy. In 
New Jersey each is given a life estate in one-third of the 
other's real property in place of dower or curtesy. Both 
dower and curtesy are life estates and on the death of the 
person entitled to such an estate the property is free from any 



44^ 



REAL AND PERSONAL PROPERTY 



claim from his or her heirs or representatives. ( See Chapter 
LXXIL) 

* 

§ 410. Homestead 

A homestead, that is, the family residence and a certain 
quantity of land adjoining it, is usually exempt by statute law 
from all debts except mortgages, purchase-money liens, and 
mechanics' liens. An old homestead may be given up and a 
new one acquired ; or a homestead right may be lost by the 
wife signing it away in a deed. In some states any home- 
stead, no matter how valuable, is exempt, but in others there 
is a limitation of value, and the excess value may be taken 
by creditors. 

1 411. Easements 

These are rights to make use of the land of another in 
some way, as by a right of way over the fields of one's neigh- 
bor, or the right to restrict another from erecting buildings 
which shut off light and air, or the right to have a drain pipe 
under another's land, or the right to have a party wall on the 
boundary line. When these rights are included in a deed of 
property they follow the property deeded and will pass with 
it to any subsequent owners. For instance, a man might want 
to sell a lot in the middle of his farm. In order to make it 
salable he gives the purchaser a right of way over the rest of 
the farm between this lot and the highroad. This right of 
way, which was the inducement to the sale and is necessary 
to the enjoyment of the property sold, passes along with tiie 
property to the next owner. It is inseparably connected with 
the property and is regarded as a part of it, and hence is 
considered real property. 

If, however, a right of this sort is given by deed separately 
from the property, it belongs solely to the person to whom 
it is given and cannot be assigned to anyone else. 



ESTATES IN REAL PROPERTY 



449 



Mere oral permission to go across another's property, to 
pick apples from his trees, etc., is a license, and the owner may 
take it away at any time. 

§413. Joint Tenancies and Tenancies in Common 

The word "tenancy" in legal parlance means ownership or 
estate in land. It is not limited to the renting of land, but 
means a holding for years or for life. Any estate in land may 
be owned by two or more persons at the same time. They 
hold it either in joint tenancy or tenancy in common accord- 
ing to the deed or instrument from which they get their title. 
A single owner would hold in severalty. 

In joint tenancy, on the death of one of the owners, the 
remaining owners take the property, the entire property going 
to the last survivor. 

In tenancy in common, if one of the several tenants dies, 
his heirs have a right to share the ownership of the property 
with the remaining tenants. 

Joint tenants or tenants in common may divide the prop- 
erty between them by agreement. If they cannot agree, they 
may bring what is known as a partition action and have the 
court divide the property between them. 



§ 413. Trusts 

When one person holds property for the benefit of an- 
other, he is said to hold it in trust. The one who holds prop- 
erty is called a trustee. The one for whom it is held is called 
the beneficiary, or in legal terms the cestui que trust. 

A corporation formed for holding property as trustee is 
called a trust company. 

A person may hold any of the estates that have been men- 
tioned, except dower and curtesy, in trust for another or for 
several others. Some states do not allow trusts which would 



4SO 



REAL AND PERSONAL PROPERTY 



ESTATES IN REAL PROPERTY 



451 



II 



prevent creditors from enforcing their claims against the prop- 
erty, except for married women and children under age. 
Trusts to accumulate income for more than a limited period 
are also prohibited. (See § 407) Trusts for charitable pur- 
poses of more than a certain amount of a person's entire 
estate cannot be created by will in many states, if the person 
is survived by husband, wife, or children. Many states also 
restrict the amount of property which a charitable organization 

may hold. 

If a person pays the price for land and another takes the 
title to it, unless a gift was intended, the person taking the 
title holds it in trust for the one who paid for it. Or if a 
person obtains property from another by representing that he 
is going to hold it for the benefit of a third party, the law 
will make him a trustee for that third party. 

Property is often deeded to trustees to hold as security 
for the payment of debts, notes, or bonds. The subject is 
considered more fully in Chapter LXXXI. 

A trustee or trustees take title to real property by will or 
by a deed, executed and recorded as any other instrument 
conveying land in due form. If such deed were informal, 
for example, not acknowledged, it could not be recorded, but 
as between the parties would be valid. The trustees would 
take title as would any grantees and their rights, duties, and 
powers are as defined and limited in the instrument creating 
the trust. They could not sell or mortgage the property unless 
so authorized, nor could they delegate any of their duties. 
If one of several trustees dies, his survivors could act, but 
not elect a successor unless specifically authorized to do so. 
If a sole trustee should die, or all of several trustees, and no 
provision were made in the deed of trust or will for such an 
emergency, the trust would not fail but the interested parties 
could apply to a court having jurisdiction to name trustees to 
fill any vacancies. 



Notes: 

1. Generally it is necessary to consult a lawyer before 

transferring an estate in real property either by 
deed or will. 

2. Never buy real property without finding out whether 

the person selling is married and, if so, whether 
the law requires the husband's or wife's consent 



Review Questions 

1. What is real property? What is the rule as to growing things? 

2. What is the meaning of the legal term "estates in land"? What 

is meant by "title to land" ? 

3. What is title by occupancy? What is the right of eminent 

domain? Is there any limit on the power of the state to tax 
land? 

4. What are the freehold estates in land? What are estates less 

than a freehold? 

5. What is a remainder? A reversion? 

6. What is an executory devise? A contingent remainder? 

7. In your state how long can a man by will or deed tie up real 

property? Why are perpetuities abhorrent to the law? 
8* What is dower ? What is curtesy ? When the grantor in a deed 

is maj-ried, why should both husband and wife join in the deed? 
9. What is the homestead exemption in your state ? 

10. What are the most usual easements? Is oral permission to go 

across another's land an easement? 

11. What is a trustee? What is a cestui que trust? For what pur- 

poses may a trust be created in your state? 

12. What does "tenancy" mean ? Distinguish "tenancy in common" 

from "joint tenancy" and "tenancy in severalty." 

13. Does a trustee hold title? Has he power of sale? 

14- May a trustee give a valid mortgage on a trust estate? 

15* If a deed of trust is unacknowledged what is the effect: (a) 

as to putting on record; (b) as between grantor and grantee? 
16. If all trustees die, who holds title and who executes trust? May 

a trustee for the management of certain properties delegate 

his duties? 



TITLE TO REAL PROPERTY 



453 



CHAPTER LX 

TITLE TO REAL PROPERTY* 

S414. Original Title 

The right to the ownership of real property was acquired 
in the first place by taking possession of it and keeping it. 
This is title by occupancy. To a certain extent this right still 
exists in parts of the United States, where unoccupied lands 
may be taken up by living on them for a certain length of 
time and filing a claim with the government. 

Where property has been in open and undisturbed (con- 
tinuous) possession of a party under a claim of right for a 
certain length of time prescribed by law, generally about 
twenty years, and when his possession is undisputed by anyone, 
the possessor acquires a good title to it. This is termed "title 
by prescription," or by "adverse possession." If any person 
who might have claimed the property was imder age, insane, 
or absent from the country during any part of the twenty 
years, he would be allowed in addition the period of time so 
lost, before his claims would be barred. ( See § ^2. ) 

I. It is not safe to rely on title by prescription in buy- 
ing property. There may have been something to 
prevent the running of the statute of limitations. 

§415. Acquired Title 

The ownership of real property today is usually by title 
acquired from someone else. It may be acquired either by 

»FoT fofiiii of deed, mortgage, mod lease, see Chapter CIX, Fonnt 70. 73. 



deed, will, or inheritance. Any transfer of real property must 
conform to the laws of the state where the real estate is 
located. When real property is left by will, it is said to be 
devised and the person who so receives it takes by devise. 

Title by Lease, Much real property is held by lease, but 
all leases are held to be personal property. A lease may be 
for a long period, say nine hundred and ninety-nine years, or 
may be from month to month. Leases are usually written 
instruments and are treated at greater length in Qiapter LXII. 

Title by Deed, The formalities necessary to transfer title 
to land by deed are taken up at length in Chapter LXI. 

Title by Devise, (See Chapter LXI on this subject.) 

Title by Inheritance. (When the owner of real property 
dies without making a will, the law of the state where the 
property is situated prescribes to whom it shall go. Their title 
is by inheritance. (See Chapter LXIII on this subject.) 



I. 



2, 



Review Questions 

What is title? How long must a person occupy land to get title 

by prescription? 
What are the usual methods of acquiring permanent title? What 

is the difference between a deed and a lease? 
When a man dies, how is it determined what happens to his real 

estate ? 



TRANSFER OF REAL PROPERTY 



455 




ill 



CHAPTER LXI 
TRANSFER OF REAL PROPERTY 

§ 416. Conveyance of Real Property 

A sale of real property must always be carried out by 
means of a document called a deed signed by the seller. If 
signed by an agent, the agent should be authorized under seal 
to act for the seller. The seller or vendor is designated as 
the grantor, and the buyer as the grantee. 

Transfer of real property may also take place through the 
death of the owner, that is, by descent, or through a devise 
made by will. If he leaves children, grandchildren, or great- 
grandchildren, they have the first right to the property. If a 
man dies without children, leaving his father surviving him, 
the father takes the real estate. If his father is dead, the 
property is divided between his mother, brothers, and sisters. 
Grandparents may take by inheritance if none of the relatives 
mentioned above are left surviving; or if grandparents are 
dead, undes and aunts may inherit. 

In all of these cases, if a man leaves a wife surviving him, 
she is entitled to her dower right in one-third of the real 
property for life. The other relatives take their rights in the 
property subject to the wife's dower right and have but two- 
thirds until she dies. In most states the laws of inheritance 
arc as given here. This subject is treated more fully in Chap- 
ter LXIII. 

Real property is conveyed by a deed in writing. The deed 
must contain a full and accurate description of the property 
by metes and bounds, or by giving the legal subdivision, or 
subdivisions; it should state from whom and in what manner 

454 



the grantor obtained the property; and if conveyed to him 
by a deed, where the former deed is recorded. The deed must 
be signed by the grantor and acknowledged before a notary, 
justice of the peace, or a commissioner of deeds by the party 
giving the conveyance, and by the husband or wife of the 
grantor if the law of the state requires this formality in order 
to cut off dower, curtesy, or homestead rights. (For acknowl- 
edgments, see Forms 9 and 10.) 

A deed should also be under seal. This today is a pure 
formality. Red wafers are generally used. In New York 
State the letters L. S., standing for the Latin words locus 
sigilli — "the place of the seal" — which were originally used 
to designate the place to affix the seal, are enough. 

In order to take effect, the deed must be delivered into the 
hands of the person to whom it is assigned or into the hands 
of an agent whom the assignee has authorized to receive it. 

A deed is presumed to take effect from delivery. Some- 
times a deed is fully executed and is then placed in custody 
of a third person or of a trust company to be delivered when 
the purchaser makes a certain payment or fulfils other condi- 
tions. A deed or other document so placed is said to be in 
escrow. 

There are two kinds of deeds in general use — quitclaim 
and warranty. A quitclaim deed merely releases the rights 
which the grantor has in the property, whatever those may be. 
Notes: 

I. It is necessary to consult the laws of the state in 
which real property is situated to know the exact 
formalities of transfer. 
Where the grantor is married the marital partner 

should always join in the deed. 
The laws on inheritance differ to some extent in the 
various states. In order to determine who are a 
man's heirs it is necessary to consult the statutes. 



2. 



iH 



45^ 



REAL AND PERSONAL PROPERTY 



TRANSFER OF REAL PROPERTY 



457 



§417. Warranty Deed 

In a warranty deed, the seller when conveying the property 
warrants that the tide is free from all defects which might 
disturb the purchaser in the enjoyment of the property later, 
and that the grantor will protect the purchaser m his rights 
and execute any further instruments that may be necessary 
to secure them. (See Form 72.) 

Where the person giving the deed wishes to convey the 
property outright and to give absolute ownership, the words 
"to him and his heirs forever" must be used. On the other 
hand, if he wishes to convey only a life estate or other hmited 
interest, these limitations must be clearly stated, or the grantee 
will take the same interest that the grantor had in the property. 
(See Chapter CIX, Form 73.) 

The essential parts of a warranty deed are as follows: 

1. The parties 

2. The consideration and grant 

3. Description 

4. Habendum clause 

5. Covenants 

6. Signatures and seal 

7. Attestation 

8. Acknowledgment 

9. Delivery 

A warranty deed under the old common-law forms is a 
rather cumbersome instrument. In some states this form is 
still used, but in many states a short-form deed has been 
prescribed by statute. Where this is the case, the instrument 

is much simpler. . j ^ 

It is necessary, when real property is to be transferred, to 
ascertain what form is used in the state in which the land is 
located. The following essentials are to be considered in every 

deed: 



1. The parties must be designated with certainty. The 
usual way to do this is to state both the surname and Christian 
name with any middle initial of each party and the place of 
residence of each. 

2. The consideration and granting clauses are placed 
briefly in the short form as follows : "In consideration of the 
sum of four thousand ($4,000) dollars in hand paid, conveys 

and warrants to ." The more cumbrous verbiage of the 

common law will be found in Form y^. 

3. Th^ description may be by metes and bounds or may 
merely name the legal subdivision. Examples of both kinds 
are shown in the forms given. 

4. The habendum clause follows and in its briefest form 
reads: "To have and to hold the said premises unto the said 
party of the second part, his heirs and assigns forever." 

5. The covenants follow. These are given in the longer 
form. (See Form 73.) 

6. The testimonium clause followed by the signatures 
and seals of the party or parties who are grantors would 
come next. 

7. An attestation clause is next in order, in those states 
where a witness or witnesses are required. 

8. The acknowledgment will follow, as indicated in the 
forms. The form of the acknowledgment and rules as to its 
execution differ in each state, and a deed must in all matters 
conform to the law of the state where the land is located. 

9. Delivery is the final act. A deed without delivery 
would be no deed and would give no one any rights. The 
delivery is an absolutely essential feature of the deed. 

§418. Records of Deeds 

A deed which has been delivered is good as between the 
two parties concerned, the seller and the purchaser of the 
property, but in order to make the purchaser's right good 



4S» 



REAL AND PERSONAL PROPERTY 



against all claims the deed must be recorded. It is usual for 
each county to have an office for the recording of all deeds 
affecting real property located in that county. 

The laws in each state usually provide for the record of 
instruments "that create, transfer, mortgage, or assign inter- 
ests in real property, whether legal or equitable, or by which 
the title to any real property is affected." * 

It is of vital importance that a deed be recorded. If a 
deed is not recorded and the seUer executes another deed which 
is filed, or a creditor of the seller secures a judgment against 
the seller, the holder of the first deed has no claim to the land. 
All he can do is to bring suit against the seller for damages. 
The record of a deed is absolutely essential to give a good title 
to the holder. 

§ 419. Restrictions in Deedr 

Restrictions in deeds are generally made for the benefit of 
the surrounding property. They are legal and binding so long 
as they are not against public poHcy ; for instance, a restriction 
for the purpose of creating a monopoly or restricting com- 
petition would be illegal. Usually such restrictions relate to 
the character of buildings which may be erected in a certain 

locality. 

If the deed provides that in case the grantee violates the 
restriction, the property is to revert to the grantor or his heirs, 
then any such violation destroys the right of the grantee ; if 
the deed does not so provide, damages must be paid for breach 
of the agreement, but right to the property is retained. 

If the restrictions arc intended to benefit the surrounding 
property, any of the owners of that property may enforce 
them. They remain restrictions on the land even when it is 
transferred to another owner. An owner who violates the 
restrictions cannot plead that they arc not mentioned in the 

I Vol. II. Reeves on Real Property, page i486. 



TRANSFER OF REAL PROPERTY 



459 



deed. If the character of the neighborhood materially changes 
so that the restrictions become unreasonable, the courts will 
as a rule permit the violation to be settled by the payment of 
damages, even though the original deed provided that the 
property was to revert to the grantor or his heirs if any of 
the imposed restrictions were violated by the grantee. 

§ 420. Searching Title 

A purchaser of property should always insist on a warranty 
deed for his own protection, unless the circumstances are such 
that he is willing to take the property even at the risk of 
further expense to protect his tide. Any restrictions in earlier 
deeds continue to affect the land, even in the hands of a later 
owner. The possibility of defects in the tide of, or existing 
claims against, any property is also always present. Therefore, 
the purchaser of real estate should always have the title ex- 
amined to make sure that his right is incontestable and that 
he is likely to remain in undisturbed possession. 

An abstract of title is a carefully written report showing 
all matters which affect the tide. These items are of record 
concerning a particular piece of land. 

To make a thorough search is no simple matter. It is 
necessary carefully to examine the various records for the 
following encumbrances : 

1. Mortgages and equitable mortgages. A vendor's 

lien duly reserved is held to be an equitable mort- 
gage. 

2. Judgments or lis pendens, i.e., notice of suits that 

affect the title. 

3. Taxes and assessments unpaid, for state, county, 

city, or for transfer. 

4. Mechanics' liens. 

5. Any rights of dower or curtesy that have not been 

released. 



460 



REAL AND PERSONAL PROPERTY 



TRANSFER OF REAL PROPERTY 



461 




This search may be most effectively made by one of the 
numerous companies whose business it is to examine such titles 
with a view to insuring their validity. As specialists in this 
complicated legal work they can quickly form a reliable opinion 
as to the validity of any title to property within a given 
locality. In many cases it is advisable to have the title guaran- 
teed by some one of the title guaranty companies. 

A method of guaranteeing any title, called the Torrens 
System, is used in Australia. This system has been adopted 
in some states in this country. Under the Torrens System in 
New York, any person having an interest m the property may 
bring a proceeding to register the title. He must prove to 
the court that his title is good. Once registered, the state 
guarantees the title and virtually insures the owner against 
adverse claims ; and any subsequent changes in the state of the 
ownership, etc., will be recorded on the registry, saving further 
searches. 

§431. Mortgage of Real Property 

A mortgage of real property is given as security for the 
due payment of a note or, more generally, a bond. A bond 
is a formal obligation, under seal, to pay money at a certain 
time or under certain conditions. A mortgage is in form 
an instrument like a deed, assigning the property in question 
to the man who has loaned the money, but providing that if 
the money is repaid when due, the assignment shall be null 
and void. Sometimes an absolute deed of land is given to 
secure the payment of money; in such case the deed is in 
reality a mortgage and may be so proved. It is classified as 
an equitable mortgage. 

Formal mortgages and deeds of trust are termed "legal 

mortgages." , ,. ^ r • ^ 

When property is sold, the usual method of securing de- 
ferred payments is for the purchaser to give a legal mortgage 



for the amount unpaid. When this is not done, the seller has 
what is called a "vendor's lien" on the land. Sometimes this 
is expressed in the deed. Such a lien is classed as an equitable 
mortgage. 

When suit is brought that will affect the title to property, 
notice of it, called a "lis pendens,'* may be filed. This gives 
a lien on the land and is considered an equitable mort- 
gage. 

The possession of the property remains in the hands of the 
mortgagor (the person who executes the mortgage), and the 
mortgagee (the person who loans the money) has the right 
to foreclose or take possession of the property if the mort- 
gagor does not live up to his agreement. The collection of 
interest on a mortgage must be provided for in the written 
agreement. 

Form of Mortgage. A mortgage is in form a deed of the 
property from the mortgagor to the mortgagee. (See § 416 
and Form 74.) If the conditions that are named in the deed 
are fulfilled it will become of no effect; if the conditions are 
not fulfilled, the mortgagee will have a right to foreclose. The 
mortgage should be under seal and should be recorded in the 
office for the registry of deeds in the county where the property 
is located. When paid, a satisfaction piece stating in simple 
terms that the mortgage has been paid and referring to the 
page of the record where it is recorded should be filed with it. 
In New York, the original mortgage together with the satis- 
faction piece should be left on file for ten years. 

Mortgageable Property. Any property, or interest in prop- 
erty which may be assigned, may be mortgaged. This includes, 
of course, any tangible property. It also includes interests in 
property which will mature only in the future. Even if they 
are interests which may never take effect, such as contingent 
remainders (see § 406), in some states they may be assigned 
and mortgaged. 






REAL AND PERSONAL PROPERTY 



§422. Foreclosure 

The term "foreclosing a mortgage" implies that legal steps 
are to be taken to sell the property and to apply the price 
realized to the payment of the debt. If more is realized by the 
sale than is necessary to pay oflE the mortgage, the interest due, 
and the expenses of the enforced proceedings, any surplus 
belongs to the mortgagor. If there is a deficit, the mortgagee 
may sue the mortgagor on the bond and collect what remains 
unpaid. Usually both bond and mortgage are sued on together. 

Up to the time the property is sold the mortgagor has the 
right to redeem it from sale by paying the amount of the 
mortgage, the interest, and the expenses up to the time of 
the foreclosure. This right of the mortgagor is termed his 
"equity of redemption." 

If the property is transferred it remains subject to the 
mortgage, but the new owner does not become personally 
responsible for the payment of any part of the debt. The 
property is bound, but if on the sale it does not bring enough 
to satisfy the mortgage, the new owner is not liable. The 
original mortgagor still remains responsible. He may give 
notice to the mortgagee to foreclose when the mortgage falls 
due, or may offer to pay the amount due and to take an 
assignment of the mortgage. 

Method of Procedure. The first step in a foreclosure is 
to file notice of the suit (a so-called lis pendens) in the office 
where the mortgage is recorded. This warns all third parties ; 
and as a result any possible rights which they may claim in 
the property or later acquire will be subject to the prior claim 
of the mortgagee as established by the suit. 

When bringing a foreclosure suit, all persons interested in 
the property must be given notice to defend their interests. 
This is done in order to give them opportunity to protect their 
rights in the property or in the surplus proceeds if there be 
any. Persons who hold liens against real property are re- 



TRANSFER OF REAL PROPERTY 



463 



quired to record them if they wish to protect their rights as 
against third parties. An examination of the books in the 
offices of record in the county where the mortgage is recorded 
will reveal the names of any such persons. 

If the property is leased, tenants should also be made 
parties defendant to the action, since possession is considered 
interest in the property and possession under an unrecorded 
deed is good notice of a possible ownership. 

§423. Kinds of Mortgages 

Deeds of Trust. Mortgages may be given by a deed in 
trust to a third party as trustee. This is the usual rule with 
corporate mortgages. These are called "deeds of trust." The 
trustee has the right to foreclose. If he fails to exercise his 
right, a bondholder may bring foreclosure for the benefit of 
other bondholders on showing the court that the foreclosure is 
necessary to protect their interests and that the trustee refuses 
to take action. 

Purchase Money Mortgages. These are mortgages given 
for part or the whole of the purchase price of land. They take 
precedence of every other claim against the property. It is 
not necessary for a wife to join in a purchase money mortgage 
in order to cut off her right of dower. The mortgage is at- 
tached to the property before it becomes the property of her 
husband, and she is entitled to dower only in what may remain 
to her husband after the mortgage on tlie property is paid off, 
or in his equity of redemption which will be his share of the 
price of the land on foreclosure sale. The rriortgage may be 
given either to the person from whom the land is bought, or 
to a third person. 

Building and Loan Mortgages. Building and loan mort- 
gages are frequently given to secure funds for erecting a build- 
ing. The money is paid over in instalments as the building 
reaches certain stages. Interest may be charged on each instal- 



464 



EEAL AND PERSONAL PROPERTY 



TRANSFER OF REAL PROPERTY 



465 



III 



I 



ment only from the time it is paid over; but the mortgagee 
may deliver the whole amount to a trust company to be held 
and paid over as the instalments fall due. FuU interest may 
then be charged, deducting the amount which the trust com- 
pany allows on the deposit. 

Sundry Mortgages. Corporate mortgages can be given 
only with the consent of two-tiiirds of the stockholders. 
Guardians and trustees may give mortgages only with the 
court's permission ; they, as weU as such institutions as savings 
banks, are also restricted in the kinds of mortgages which they 
may accept. In New York, savings banks may hold mortgages 
on improved real property to an amount not exceedmg 60 
per cent of its value. Trustees and guardians are limited 
to the same kinds of investments as savings banks. 

If an executor or an administrator gives a mortgage, the 
agreement binds only himself personally and not the property 
of the estate, unless the executor is given power to mortgage 

in the will. 

Contract to Mortgage. This must be in writing and signed 
as is a contract for a deed (see § 416.) The mortgagee can 
compel the mortgagor to carry out his contract and to give 
him a mortgage on the property, because his agreement con- 
cerns real property ; the mortgagor, on the other hand, has a 
right to damages only in case the mortgagee fails to carry out 
his agreement. If mortgaged property is sold and the mort- 
gagee at the request of the new owner extends the time for 
payment, he relieves the original mortgagor and can only 
recover from foreclosure and the new owner. 

Notes: 

I. Everything necessary to keep the property in good 
shape, such as payment of taxes, repairs, etc., 
should be provided for in the mortgage, with a 
proviso allowing the mortgagee to foreclose if the 



2. 



payments are not kept up ; and it should be pro- 
vided that in case any suit is brought against the 
mortgagor concerning the property, he will have 
the mortgagee brought into court to protect the 
latter*s rights. 
A mortgage should always state what other claims 
there may be against the property at the time the 
agreement is made. If the property is sold on 
foreclosure and the purchaser is not informed in 
regard to these claims, if any, he may refuse to 
take the property. If they are indicated in the 
mortgage they cannot be overlooked when the sale 
is made. 



Review Questions 

1. What is a deed? 

2. What is a quitclaim deed ? What is a warranty deed ? 

3. What are the essential features of a warranty deed? What arc 

the requisites of a deed in your state? 

4. What is meant by the execution of a deed? 

5. What is essential to the proper execution of a deed conveying 

land? Is attestation required in your state? 

6. Define acknowledgment of a deed. What is its object? Why? 

Is it essential? 

7. When does the record of a deed take effect? How must a deed 

be recorded? 

8. Is recording of a deed not properly acknowledged good against 

creditors and subsequent purchasers without notice? 

9. When does a deed conveying realty take effect? What is the 

legal presumption? 
10. What is meant by placing a deed in escrow? 
n. By the law of what place is a contract for the transfer of real 

property governed? 
12. If restrictions on the use of real property become unreasonable, 

what relief will the courts give? 



466 



REAL AND PERSONAL PROPERTY 



13. What is the object of searching title? What is an abstract of 

title? What is the Torrens System and what are its ad- 
vantages? 

14. What is a mortgage? A bond? A deed of trust? 

15. May a conveyance of property, absolute on its face and under 

seal, be shown by outside evidence to be only a mortgage? 

16. Define equitable mortgage. What kinds of foreclosure are there? 

17. Define mortgagor's equity in real estate. 

18. Before completion of an action to foreclose, the mortgagor 

goes into bankruptcy. Can the mortgagee foreclose? Can he 
enforce the bond? 

What is the method of foreclosing a mortgage? 

A mortgage is not paid off by foreclosing. What rank has the 
claim of the mortgagee for the remainder among claims of 
other creditors on other property of the debtor ? 

Who may redeem real property from a forced sale and within 
what period of time? 

Has a judgment when docketed preference over an existing un- 
recorded mortgage? 

A makes a bond and mortgage, and later transfers the property 
to B. B, when the mortgage falls due, gets an extension. Does 
this affect A's liability on his bond ? 

A borrows money from B and mortgages his house as security. 
A then sells the house to C, who pays to A the difference 
between the value of the property and the amount of the 
mortgage. The mortgage is unpaid at maturity, B forecloses 
it, and the property is sold for less than the amount of the 
mortgage. Can B collect the difference from either A or C? 
Explain fully. 
25. A held a bond and mortgage executed by B for the sum of 
$5,000. B paid A in instalments from time to time until he 
had paid $4,000. A assigned the bond and mortgage to C, 
receiving from him $5,000. Afterwards, B tendered C the 
$1,000 still due and demanded satisfaction of the mortgage, 
which C refused and brought suit to foreclose. Is C entitled 
to recover the full amount? Give the reasons for your answer. 



19 
20 



21. 



22. 



23. 



24, 



CHAPTER LXII 

LANDLORD AND TENANT 

§ 424. Lease of Real Property 

A lease of real property gives the right to its use for a cer- 
tain length of time in return for rent. A lease may be at will; 
that is, no definite time may be fixed for its termination, but 
in that case the landlord may bring it to an end when he 
wishes ; or it may be for a fixed period, such as a year, or a 
month. At the end of the period the lease ends. If the tenant 
remains in possession of the property, the landlord may regard 
him as a trespasser and request him to leave, or he may permit 
him to remain and may accept rent, in which case a new lease 
is implied for the same period as the old one. 

If the tenancy was from year to .year, the new lease will be 
for a similar period. In case of such a lease, either party must 
give the other six months' notice in order to terminate the 
lease. This was the common law rule. In many states this 
has been changed by statute and only three months' or sixty 
days' notice is required. If the lease ran from month to 
month, then twenty days' notice is sufficient. The notice must 
be given the required period before the end of the year, or 
twenty days before the end of the month — otherwise the lease 
will run over for another year or another month. A lease 
can be ended only at the close of the year or the month. An 
agreement for a definite term, as for a month or a year, 
requires no notice. It simply terminates at the specified time, 
and the tenant may leave or the landlord take possession with- 
out recourse to the other party. 

In New York a lease for more than one year is void unless 

467 



I 



468 



REAL AND PERSONAL PROPERTY 



LANDLORD AND TENANT 



469 



III 



m\ 



in writing, signed by the party or his agent, who is required 
to have written authority to execute a lease of this kind. That 
is to say, the contract as between landlord and tenant is not 
illegal or void if carried out by them ; but should a suit arise, 
unless a memorandum or some writing signed by the person 
to be charged can be shown by the plaintiff, the contract is 
void and no action will lie. 

The bankruptcy of a tenant will not affect the lease. 

A tenant when quitting the premises must take all his 
possessions with him, as any property remaining on the 
premises after the expiration of the term will constitute a 
holding over. Where, however, the landlord or the janitor 
allows property to remain on the premises for a time, to con- 
venience the tenant, this will not constitute a holdover. 

An estate at will may be terminated at any time by the 
mutual consent of the parties. If an owner transfers property 
to a third party, a tenancy at will is terminated. Tenants at 
will may not sublet 

§425. Parties to a Lease 

The parties to a lease are the landlord— the owner who 
lets the property — and the tenant who rents. The tenant is 
obliged to pay rent and to keep the property in as good condi- 
tion as received, reasonable wear and tear excepted. Where 
the landlord is responsible for the maintenance of hallways, 
basements, etc., as in an apartment house or an office building, 
he must keep them in usable and safe condition. Otherwise, 
he is not bound to make repairs unless it is provided that 
he shall do so in the lease. But if there is any defect in the 
property which could not be discovered on examination at 
the time when the lease was signed and of which the landlord 
knew, such, for instance, as impure drinking water, which only 
experts could detect, the landlord is liable in damages and the 
lease may be treated as broken. 



§426. Rights and Duties of Landlord 

If the tenant fails to pay rent or breaks any other agree- 
ment in the lease, the landlord may evict him. If the landlord 
accepts any of the rent due after the tenant has broken the 
lease in this manner, he cannot put him off the premises, but 
may bring suit to collect the remainder of rent or for damages. 
In case of eviction the tenant must be given due notice, the 
length of time depending upon statutory requirements. 

At common law, if leased buildings were destroyed, the 
tenant had to continue to pay rent and might be compelled to 
rebuild. Some of the states have changed this Ijy legislation, 
so that tenants who are not at fault may in such cases terminate 
their leases by vacating the premises promptly if the buildings 
are rendered untenantable by reason of fire, dampness, offen- 
sive odors, defective plumbing, and the like. Except by ex- 
press stipulation, the owner pays all taxes and assessments. 

It is the duty of the owner to provide suitable guards at 
elevator shafts, and the tenant as well as any third person may 
recover from him for injury due to his failure to do so. 

The lessee need not permit anyone to enter upon the 
premises he has leased, unless, as is usual, it is stipulated that 
for a certain time before the expiration of the lease, pro- 
spective tenants shall be admitted. If, however, the landlord 
is compelled by law or city ordinance to make alterations, he 
may of course enter upon the premises and make the required 
changes. A building which has been erected by a tenant on 
the land leased by him, becomes a part of the realty and 
belongs to the landlord. 

§ 427- Rights and Duties of a Tenant 

If the landlord takes possession of a whole or part of the 
premises during the term of the lease, this is equal to eviction 



m 



470 



REAL AND PERSONAL PROPERTY 



LANDLORD AND TENANT 



471 



It 



fli 



i! 



and is so called. Such procedure constitutes a breach of the 
lease on the landlord's part and the tenant need not thereafter 
pay rent. If the tenant is evicted from only part of the 
leased property, he may remain on the rest of it and refuse 
to pay rent. 

If the landlord permits anything which renders the prop- 
erty uninhabitable, such as insufficient heat in an apartment 
house, this is termed a constructive eviction. The tenant has 
then the right to move out and refuse to pay any more rent; 
but if he remains he must pay. If the tenant supplies the heat 
himself or makes repairs which the landlord should have made 
under the Icrase, he may collect the money he has spent from 
the landlord ; but if such expenditures are deducted from the 
rent this procedure gives the landlord the right to terminate 
the lease. 

The tenant has no right to utilize the resources of the 
property, except wood used to make necessary repairs. If 
there are developed mines on the land he may work them 
unless forbidden by the lease, but he has no right to open 
mines. He has a right to fruit, grass, etc., which ripens or 
is cut or picked before the lease runs out, and a right to any 
crops which he has planted himself if he has reason to expect 
that they will be ready to be gathered before the lease 

expires. 

The tenant may not make alterations except with the land- 
lord's consent. If the landlord has not consented, the car- 
penters and builders will not have a mechanics' lien against 
the building. 

If the action of the elements renders part of the leased 
premises untenantable, even though the landlord immediately 
sets about repairs, the lessee may consider the lease broken, 
pay rent up to that date, and leave. But the lessee may not 
claim any damages for loss incurred, whether or not he 
remains. 



§ 428. Expediency of a Written Agreement 

A lease must be in writing if for a longer term than a 
year. In some states it need not be in writing unless it is 
to run for three years or more and need not be under seal. 
A written agreement, however, should be made whether the 
statute requires it or not, and should state whose duty it is 
to make repairs, and what notice shall be necessary to terminate 
the lease. If the landlord does not want the premises sublet, 
he must see that a provision against subletting is included. 

Unless forbidden in the lease, the tenant may sublet either 
the whole or a part of the premises. He remains responsible 
to the landlord for the payment of rent and for the relinquish- 
ing of the property in as reasonably good condition as received. 

In every locality landlords have printed forms of lease and 
tenants are rarely in a position to insist on any variation of 
terms. 

It is not necessary to record any lease, but it is wise to 
do so if the tenant does not intend to occupy the premises 
he has leased. If this is not done and the landlord leases the 
same property to an innocent third party, the third party will 
not be obliged to give up possession to the first lessee. 

Note: 

I. The tenant is at a disadvantage and must depend 
largely on the landlord's character for fair deal- 
ing. 



Review Questions 

I. What is a tenancy at will? What notice would be required to 
terminate a tenancy at will ? What notice for a tenancy from 
month to month ? What notice of lease is for a definite term ? 

What leases are required to be in writing? What leases should 
be recorded? 

On an oral ten-year lease, B enters and pay two years' rent. 
Can A eject B without notice? 



2. 



iHi 




472 



REAL AND PERSONAL PROPERTY 



4. Is a landlord obliged to make repairs? 

5. If a landlord permits unsanitary conditions, what is the effect? 

What is the usual result of disputes between landlord and 
tenant? What is a constructive eviction? 

6. If a house were struck by lightning and part of the roof de- 

stroyed, what would the rights of the parties be? 

7. What are the advantages of a written lease? 

a Does a tenant have the right to sublet the premises? 






PART XI 
WILLS AND INHERITANCE 




I II 



: 



CHAPTER LXIII 

DISTRIBUTION OF PROPERTY OF AN INTESTATE 

§ 429. Definitions 

If a man dies without making a will, he is said "to die 
intestate," and the law will distribute the property he has left 
after his death to those people whom it considers entitled to it. 
These are his closest relatives. The law differs with re- 
gard to the distribution of real property and personal property. 

A will is a formal written disposition of his property to 
take effect after his death, made by a person of sound and 
disposing mind. 

Personal property left by a will is called a "legacy," and 
the person to whom it is left is called a "legatee." 

Real property left by will is called a "devise" and the 
person to whom it is left is called a "devisee." 

An heir, in the strictly legal sense, is one who inherits real 
estate. 

A testator is one who makes a will. 

Next of kin are those most closely related. 

Distribution is the legal term for the disposition made by 
law of the personal property of a person dying intestate. 

An administrator is a person or a trust company appointed 
by a probate court to dispose of the effects of the intestate. 

The probate court or an orphan's court or a surrogate's 
court is a special court having charge of all matters relating 
to the proof of wills and settling of estates. 

§ 430. Rules of the Common Law 

By the rules of the common law all realty goes to the 
eldest son; this is called the "law of primogeniture"; if there 

475 



47<i 



WILLS AND INHERITANCE 



DISTRIBUTION OF PROPERTY 



477 



if 





be no son, then it goes to daughters as tenants in common. 
The inheritance can never ascend; it must always descend. 
Husband and wife have curtesy and dower only ; they do not 
inherit from one another. The descent is always traced from 
the common ancestor, and the degree of consanguinity is 
measured by the distance from the common ancestor on the 
part of the descendant. Personal property passes to the next 
of kin. 

These rules have not been followed in this country, but 
in each state it is provided by statute how real and personal 
property shall be distributed after the death of the owner. 

§ 431. What Will Become of Real Property 

In the state of New York, if a person dies intestate leav- 
ing real property, the law will dispose of it in the following 
manner: 

I. Lean/ing children but no husband or wife: 

(a) If all are living, each one gets an equal share. 

(b) If some are living, and some are dead, the property 

will be divided into as many equal parts as 
there are children living, and children who have 
died but left children, and 
(i) Each living child gets one of the equal 
parts. 

(2) The share of each dead child is divided 

equally among his or her children. 

(3) If any children have died leaving no 

children, the property is divided as 
though they had never existed. 

(4) To illustrate, if the deceased had four 

children, the first of whom had died 
childless, the second of whom had died 
leaving one child, the third of whom 



had died leaving two children, and the 
fourth of whom was living, his prop- 
erty would be divided into three equal 
parts, completely disregarding the first 
who had died childless. The child of 
the second would receive one share, 
the two children of the third would 
each receive half a share, and the 
fourth, the surviving child of the de- 
ceased, would receive one share. 
Legally adopted children usually have 
the same rights as one's own children. 

2. Leaving grandchildren, but no children: 

(a) If all are living, each one gets an equal share, that 

is, they share per capita. 

(b) If some are living and some are dead, the property 

is divided in the same way as in the paragraph 
above, and 

(i) Each living grandchild gets one of the 
equal parts. 

(2) The share of each grandchild who died 

leaving children is divided equally 
among his children, that is, they share 
per stirpes. 

(3) What applies to children applies also to 

grandchildren who have died leaving 
no children. 

3. Leaving great-grandchildren, but neither children nor 

grandchildren: 

The same thing follows as in the case of children and 
grandchildren, as given above. 

4. Leaving no children, grandchildren, or other descendants: 

(a) If the deceased's father and mother are both liv- 





1 1 



478 WILLS AND INHERITANCE 

ing, generally speaking all the property goes to 
deceased's father unless it came to him or her 
from the mother's side. 

(b) If the deceased's father is dead and mother living, 

she usually gets the use of the property for life, 
and after her death it is divided among de- 
ceased's brothers and sisters. 

(c) If the deceased's father and mother are both dead : 

(1) The property is divided equally among 

deceased's brothers and sisters; the 
share of any brother or sister who is 
dead leaving children being divided 
equally among his or her children in 
the same manner as explained in 
paragraph l-b. 

(2) If there are no brothers or sisters, the 

property is divided among nieces and 
nephews and their children in the same 
way, and so on down through grand- 
nieces and grandnephews, great grand- 
nieces and great-grandnephews, etc.; 
except that property which came to the 
deceased from the mother's side will 
be divided among uncles, aunts, and 
cousins on the mother's side, if there 
are any; property which came to the 
deceased from the father's side will 
be divided among uncles, aunts, and 
cousins on the father's side, if there 
are any, in the same way. 

(3) Where there are no uncles, aunts, or 

cousins of any degree, the grand- 
parents take it. If the property came 
from the mother's side, the grand- 



DISTRIBUTION OF PROPERTY 



479 



parents on that side take it, if they are 
living; if from the father's side, the 
grandparents on that side in the same 
way; if from neither, it is equally 
divided among all surviving grand- 
parents. 

Children of the half-blood inherit only from their own 
parents. 

Half brothers and sisters, and uncles and aunts who were 
half brothers or sisters of the parents of the deceased will take 
the same shares as whole brothers and sisters, uncles and 
aunts. 

If a man dies intestate, leaving a wife, she will be entitled 
to the use of one-third of his real property during her life. 
This is known as the right of dower. Other persons who in- 
herit must allow her this right, or pay her an equivalent in 
money. (See § 409.) 

If a woman dies without leaving a will, and she has had 
children, her husband will be entitled to the use of all of her 
real property during his life. This is known as the right of 
curtesy. The children can take the property only after he is 
dead. If there have been no children, the property goes to the 
relatives first named. ( See paragraph 4 above. ) 

If a person dies intestate without leaving any relatives his 
or her property goes to the state. 

When, during his lifetime, a person has transferred real or 
personal property to any children, the amount of the advance- 
ment will be subtracted from the share which is given the 
child at his death so that all the children in the end may share 
alike in the property. The law regards the person who is dead 
as having made the transfer as an advancement of the share 
which the child would have received at his death. Not all 
gifts or sums of money, however, which are given to a child 



I.f 



4B0 



WILLS AND INHERITANCE 



DISTRIBUTION OF PROPERTY 



arc accounted as advancements. On this account advance- 
ments are sometimes a cause of contention and ill-feeling. 

The statements above are based on the inheritance law of 
New York. Other states follow the same general lines, but 
may differ in some particulars, and the statutes of the state 
in which the property is situated should be consulted. The 
law of the state where real property is located always governs 
the disposition of the property. 

§432. What Wm Become of Personal Property 

If a resident of New York dies without making a will, his 
personal property will be distributed in the following manner, 
depending on which of the relatives mentioned is left: 

1. Leaving a husband or wife and children: 

One-third goes to the husband or wife, and the other 
two-thirds are divided equally among the children. 
The shares of any children who are dead are equally 
divided among their children in the same way as in 
the case of real estate. (See paragraph i-b in § 431.) 

2. Leaving children hut no husband or wife: 

The property is divided among the children equally, the 
children of any who are dead receiving their parent's 
share which is equally divided among them. 

3. Leaving a wife but no children: 

(a) If the deceased's father is living, the wife gets 
one-half the property; the father, the other 
half. 
* (b) If the deceased's father is dead: 

( I ) The wife gets one-half and the other half 
is divided equally between the de- 
ceased's mother and brothers and 
sisters. If any of these is dead, his or 



481 



her share goes to his or her children 
in equal parts. (See paragraph i-b in 

§ 431.) 

(2) If deceased has no brothers and sisters. 

but has nephews and nieces of any de- 
gree, the other half is divided equally 
between the deceased's mother and 
such nephews and nieces. The share 
of a nephew or niece who has died is 
divided equally among his or her 
children (see paragraph i-bof § 431.) 

(3) If deceased leaves neither brothers nor 

sisters, nephews nor nieces of any de- 
gree, the wife takes one-half and the 
mother the other. 

(4) If deceased leaves neither father nor 

mother, brothers nor sisters, nephews 
nor nieces, the wife gets the entire 
property. 

4. Leaving a husband but no children: 

The husband takes all the estate. This is the old com- 
mon law rule, and applies because no state legislature 
has changed it. 

5. Leaving no husband, zvife, or children: 

(a) If deceased's father is living, he gets the whole 

property. 

(b) If deceased's father is dead: 

(l) The property is equally divided among 
deceased's mother, brothers, and sis- 
ters, and the children of such as are 
dead ; or, if there are no brothers and 
sisters, between deceased's mother and 
nephews and nieces of any degree and 



I 



482 WILLS AND INHERITANCE 

the children of such as are dead, in 
the same way as explained in i-b of 

§ 431. 

(2) If there are no brothers or sisters, 

nephews or nieces of any degree, then 
deceased's mother receives the whole. 

(3) If deceased's mother is dead too, the prop- 

erty will go to uncles and aunts, or, if 
none be living, to cousins of any de- 
gree or to grandparents. In the case 
of any of these relatives^ if any have 
died leaving children, the children do 
not receive a share. The property is 
divided among those who are living. 

Where a person dies intestate leaving no relatives at all 
any personal property which came to the deceased from a de- 
ceased husband or wife will be distributed among the deceased 
husband's or wife's surviving relatives in the manner illus- 
trated above. Any which did not so come will go to the state. 

Half brothers and sisters are counted as own brothers and 
sisters, and uncles and aunts who were half brothers and 
sisters of the parents of the deceased as fully related. 

This distribution of personal property is in accordance 
with the law of New York. In other states it is important to 
consult the local laws as to the distribution of personal prop- 
erty as they differ greatly. Personal property is always dis- 
tributed according to the law of the state of which the deceased 
was a resident. A wife's residence is where her husband lives 
even if she is actually living apart from him, unless she has 
had a legal separation, a divorce, or good grounds for either. 
(See § 476.) The residence of a person under twenty-one 
is his father's residence; or his mother's, if his father is not 
living. If his mother has remarried, the child's residence does 



DISTRIBUTION OF PROPERTY 



483 



not change but remains in the state in which his mother was 
living before she remarried. 

§433- l8 it Wise to Make a WiU? 

As a general rule a will is better. Usually a person can 
distribute property more justly and provide more generously 
for those who need his help than can be done by the general 
rules of the law. Even if a person is satisfied with the dis- 
position which the law makes of his property, he can, by 
making a will, save his surviving relatives trouble and expense. 
If there is any personal property to be distributed or any debts 
are to be paid, it will be necessary for someone to take out 
letters of administration and the person taking them out will 
be obliged to give a bond in double the amount of the prop- 
erty, which means expense and trouble. A person may pro- 
vide in his will that his executor may serve without giving a 
bond. 

Whenever there is no will the law gives the administration 
of the estate to the nearest relative who is willing to take it, 
a surviving husband or wife coming first in order. To avoid 
this, it may be preferable to select some other person of 
superior business ability to take charge of the estate. If this 
IS done the consent of the party to serve should be first pro- 
cured, as he may refuse and the administration of the estate 
will then come back to the person whom the law selects, even 
though there is a will. 

A trust company may act as executor and in most cases this 
will be more satisfactory than the designation of an individual. 
Note: 

I. If the person to whom you are going to leave the 
bulk of your property is a person of integrity and 
fair business ability, it is advisable to name him as 
executor. Persons not interested in the estate are 



484 



WILLS AND INHERITANCE 



apt to shirk the responsibility, especially if they 
are required to go to the expense and trouble of 
procuring bonds. 



Review Questions 



I 

2. 



Define a will, heir, devisee, legatee, testator, intestate, next of kin. 

Give the common law rules as to the distribution of property of 
an intestate. The common law rules are simple. What criti- 
cism would you make? 

3. Give abstract of the disposition of an intestate's real estate in 

your state: (a) where there are children; (b) where there 
are no children, but both parents live; (c) where there are 
no children, but one parent lives; (d) where there are no 
children or parents, but brothers and sisters and children of 
a deceased brother. 

4. Give abstract of disposition of persona] property of an intestate 

in your state. (Same details as for real property.) 

5. What law governs as to the inheritance of real estate? 

6. What law governs as to the distribution of personal property? 

7. An intestate in your state leaves real estate that had been left 

him by his maternal grandfather. He leaves no children, but 
father, mother, brother, and children of a deceased sister arc 
living. To whom would the property go? If the real estate 
had been purchased, to whom would it go? 



CHAPTER LXIV 

HOW TO MAKE A WILL 

§ 434. Who Can Make a Will 

Persons under age cannot make a will, except of personal 
property. Generally at the age of eighteen, or at an earlier age 
in some states, one may make a will of personal property. 

In some states a woman after her marriage can make a 
will only with the consent of her husband. 

In order to determine whether a person is old enough to 
make a will of personal property, or whether a married woman 
must have her husband's consent in order to make a will, it is 
necessary to consult the statutes of the state where the person 
lives, if the will concerns personal property; of the state where 
the property is located, if it concerns real estate. 

"Sound and Disposing Mind/' The essential quality of 
mind necessary for making a will is the ability to comprehend 
the nature, amount, and value of one's property in a general 
^y, the number and the claims of one's relatives, and the 
eflFect of the will. Any form of mental weakness or delusion 
which affects this ability or affects a person's relations with 
his family at the time of making his will, will render him in- 
capable of making a valid will. No other form of mental 
weakness and no other delusion will affect a person's ability 
to dispose of his property, and a will made during a lucid 
mterval in insanity will be valid. 

S 435. Restrictions on the Power of Making a Will 

The power to leave property by will is derived from the 
law and depends solely on the law for its extent and enforce- 

48s 



I 



486 



WILLS AND INHERITANCE 



HOW TO MAKE A WILL 



487 



ment. This power is not a natural right, as is the right of 
living men to own and control property created by their labor. 
When brain and hand no longer act, the natural right ceases 
and the right to control property is only that given by the 
law. 

Before property can be distributed among those to whom 
the deceased wished it to go, his debts must first be paid. 
Debts are always paid, if possible, out of the personal property, 
so that if there is no provision in the will to prevent this, the 
result may be that those to whom personal property has been 
left may get nothing, while the gifts of real estate may be 
carried out in full. 

In most states there is some restriction on the right to 
leave property to charity when one dies leaving a husband, 
wife, or children surviving. In New York, if the deceased 
person leaves husband, wife or child, not more than fifty 
per cent of the property can be left to charitable organiza- 
tions. 

As a general rule, where a woman marries after making a 
will, or where a man marries and has children, any will pre- 
viously made is revoked and a new one must be made. This 
is to protect the claims of the husband, wife, or children, as 
the case may be. A man may cut off children from sharing 
in his estate, but his intention to do so must be made evident 
In some states it is not possible for a woman to cut off her 
husband from some share in her property, even by a will ex- 
pressly stating such an intention. 

As a usual rule where some of the children are bom after 
tht, making of the will, the whole will does not fail, but the 
share, which the children would have had, had there been no 
will, (see §§431 and 432) is taken out of the property first 
and given to them, and then the remainder of the property, 
both real and personal, is divided in accordance with the 
terms of the will. 



2. 



3 



4. 



5. 



6. 



Notes: 

I. If you wish to cut off any of your children from a 
share of your property, it should be stated in plain 
terms and the reason should be given.* 

A devisee is one to whom real estate has been left 
by will. 

A legatee is one to whom personal property has been 
left by will. 

An executor is a person or trust company named 

in a will to carry its provisions into effect. 
A woman must make a new will in case of subse- 
quent marriage, or a man in case of subsequent 
marriage and the birth of children. 
By setting aside a certain amount of property for 
division among any children that may be bom 
after the making of the will, or expressly provid- 
ing that they are not to share in the property, the 
upsetting of the will by their birth may be avoided. 
A provision may be inserted in a will that in case 
debts to a large extent have been paid out of the 
personal property, those to whom the real estate 
was left shall contribute pro rata, so that each 
person shall get a proportionate amount of the 
property left him whether realty or personalty. 

§436. General Form for Wills 

There are certain formalities which must be complied with 
m aU wills. The easiest way is to remember how they are to 
be complied with. The first paragraph pf a will should con- 
tain the statement that it is the ''Last Will and Testament'* of 
the person making it, giving his name and address in full 
(including county and state) and the date on which it is made 
It should also state that the testator (the person making a 
will, revokes all previous wills.) 



7. 



488 



WILLS AND INHERITANCE 



ii I- 



The following is a brief form of the correct commence 
ment of a will: 

I, John Smith, of 206 Lexington Avenue in the Borough 
of Manhattan, City, County, and State of New York, re- 
voking all wills by me heretofore made, do hereby publish 
and declare this my Last Will and Testament on this ist day 
of February, nineteen hundred and twenty, in manner 
and form following: .... 

The will must be signed and sealed at the end by the testa- 
tor. He must sign it in the presence of witnesses — it is wisest 
to have at least four, unless you know how many are required 
in the particular state, as the laws of the various states diflFer 
as to how many there must be — ^and must declare to them that 
it is his last will and testament and ask them to sign it as 
witnesses. The witnesses must sign the will in his presence, 
and must also give their addresses. The law provides for a 
heavy fine if they omit the latter. In no case must the wit- 
nesses be legatees or devisees under the will. As witnesses 
are expected to survive the testator, they should be younger 
than he is. 

The best way is to end the will with what is known as an 
attestation clause, stating all of these things. This will remind 
the maker of the will of what is required and when the will 
comes to be probated will be regarded as showing that it was 
properly executed unless testimony is introduced to show that 
the statements were not actually complied with. 

The following is a correct attestation clause. It must fol- 
lo\y immediately after the testator's signature : 

Signed, sealed, published, and declared by the above- 
named testator. John Smith, on the ist day of February, 
nineteen hundred and twenty, as and for his Last Will 
and Testament in the presence of us who, at his request and 
in his presence and in the presence of each other, have here- 



HOW TO MAKE A WILL 

unto subscribed our names as witnesses the same day and 



489 



The words "published and declared" refer only to the state- 
ment made to the witnesses before asking them to sign 

In New York the letters L. S. are sufficient for a seal In 
some states a little red wafer, carried by any legal stationer 
is used. ' 

The will of the late Edward H. Harriman which follows 
IS brief and yet contains everything the law requires: 

I, Edward H. Harriman. of Arden, in the State of New 
York, do make, publish, and declare this as and for my last 
will and testament, that is to say: 

I give, devise, and bequeath all my property, real and 
personal, of every kind and nature, to my wife, Mary W 
Harriman, to be hers, absolutely and forever, and I do 
hereby nominate and appoint the said Mary W. Harriman to 
be executrix of this will. 

In witness whereof I have hereunto set my hand and seal 

Edward H. Harrima.v. (l. s.) 

.. ^Tf\""'^^'^- P""''''*''' ="<! declared by the testator 
as and for his last will and testament, in our presence, who 

lh'%r"f ' '""^ '" •''' P'*=™"' ^"<» '" 'he presence of. . 
astit°nes'i's "' '"' °' " ''"""'° ^"''""''«' °" "=>-« 

Charles A. Pea body, 

13 Park Avenue, New York. 

C. C. Tegethoff, 
291 East Seventeenth Street, 
Flatbush, L. I. 

fire/" Y'f ^^"^ ^ ^^"' ^t is always usual to put the large gifts 
first and the small bequests at the end. ^ ^ '^s 



490 



WILLS AND INHERITANCE 



HOW TO MAKE A WILL 



491 




§437- Kinds of Wills 

Nuncupative Wills. Soldiers and sailors when about to 
die in battle may make their wills leaving personal property 
by word of mouth in the presence of witnesses. This is known 
as a nuncupative will. It is not a safe method to employ. 

Holographic Wills. In some states, a will entirely in the 
testator's own handwriting does not need witnesses. The 
handwriting is sufficient to prove it. This is called a holo- 
graphic will. It is very much safer to have witnesses. The 
will is good only in the state and not if it affects real property 
outside the state. 

§ 438* Executors 

What Powers to Give Executors. The executor or execu- 
tors named in a will may be dead or mentally incapacitated at 
the time of the person's death or they may refuse to serve. It 
is wise to provide an alternative or several alternatives, or to 
make a trust company executor. 

In case some of the executors refuse to serve, the will 
should provide that the others may act without them. To 
avoid future difficulty, the will might also state that in case of 
a dispute a majority may decide any matter. 

Executors should be given in the will the power to sell real 
estate if it is necessary in order to pay debts or to carry out 
the provisions of the will. Otherwise, where personal property 
is insufficient to satisfy the gifts which were made by the will, 
the executors will have to get an order from court before real 
property may be sold for the purpose. 

In order to induce an executor to serve, the will should 
relieve him from liability for anything except dishonesty. 

§ 439. Thistees 

If it is necessary to hold property for any length of time 
before final disposition, trustees must be appointed, or the 
executors may be authorized to act as trustees. 



In naming trustees, it is also wise to make provisions for 
an alternative in case any trustee named cannot serve. If 
there is an enforceable trust the court will, on application, 
appoint a trustee to take charge of it, but if the maker of the 
will wished to exercise his own judgment he should name his 
choice. 

Unless the united judgment of all the trustees is desired 
on matters connected with their trust, if there are several 
trustees, the will should provide that a majority may act in any 
matter. Trustees should always be given powers to sell any 
of the property from time to time when it becomes necessary 
to protect the estate, and to reinvest the proceeds. 

As the range of investment which the law allows a trustee 
is very limited, it is a good idea to provide in the will in what 
kinds of property, stocks, bonds, etc., he is to be allowed to 
invest. Trustees may be given the power to appoint their own 
successors in any way that the person making the will thinks 
fit. 

At the present time it is the better practice to name a trust 
company as trustee instead of private persons. 

In many cases consideration of the circumstances will lead 
to the appointment of a trust company, or a bank entitled to 
exercise fiduciary functions, to act as executor or trustee, for 
reasons so generally accepted that they are now almost 
axiomatic. A few of these reasons are: 



I. 
2. 



The financial responsibility of the trust company. 

Its continued existence: the individual named as 
executor may die— a corporation has unlimited 
existence, and the maker of the will, therefore, 
is assured that the executor of his choice will be 
living and competent to act. 

Accumulated experience: the individual may act as 
executor once in his lifetime— the corporate 



492 



s. 



WILLS AND INHERITANCE 

executor or trustee, whose business it is to act 
in such matters, is constantly accumulating ex- 
perience which no individual can hope to possess. 

Financial judgment: the directors and officers of a 
well-organized corporation, through the general 
transaction of their business, are usually far better 
able to invest funds and handle business matters 
than an individual. 

An impartial viewpoint: a corporate executor is not 
concerned in family disputes, has no interests to 
serve except the execution of the plain directions 
in the will and the protection of the interests of 
the beneficiary. It cannot profit through its acts 
other than by the commissions which it receives 
by law. 

"Whoever is appointed executor, all these factors should 
be borne in mind. The executor selected should be one who 
reasonably may be expected to be living at the time the will 
goes into effect, should be responsible, of good judgment, and 
absolutely impartial in the exercise of the great trust com- 
mitted to him." 

§440. Trust Estates 

A trust is a fiduciary relation. It is usually created by 
will or deed. Two or more trustees are usually appointed. 
When one dies the other has power to act unless the instru- 
ment provides for a successor to be appointed. When trustees 
are directed or authorized to act, all must join unless the deed 
of trust provides that a majority can act. 

A trustee's powers will depend on the instrument creating 
the trust. Unless specifically authorized he cannot sell or 
mortgage the trust property. 

Trusts, trustees, and trust estates are all under the con- 



HOW TO MAKE A WILL 



493 



trol of courts of equity. For any abuse of authority by a 
trustee the remedy would be in a court of equity. If necessary 
the trustee will be removed and a successor appointed. If 
circumstances make it difficult or impossible for the trustee to 
decide as to the proper action to take, he may ask the court 
to make an order in the matter. This will relieve him from 
responsibihty. 

§ 441. Statutes 

The form in which a will of real property must be drawn, 
as well as the disposition of the property by its means, is 
governed by the law of the state where the property is located. 

A will of personal property must be drawn up in accord- 
ance with the law of the state of which the testator is a resident 
at the time of his death. 

Any will must therefore comply with the laws of the state 
of which the testator is a resident and with the laws of any 
other states in which real property devised by the will is 
situated. If the precaution is taken to have at least four wit- 
nesses, it will satisfy the law of most of the states of the 
Union. 

But in order to find the regulations governing the manner 
in which property may be left, the real property law of the 
state in which the property is located and the personal property 
law of the state in which the testator resides must be con- 
sulted. 

Death of Beneficiary, In most cases a general clause is 
added providing that all the residue of the property goes to 
some particular legatee. This portion so left is called the 
"residuary estate." In case of the death of any beneficiaries 
before the death of the testator, the legacies would lapse, 
except in the case of legacies to children or to son-in-law or 
to daughter-in-law, whose children would inherit after them. 
This lapse may be avoided by leaving the property to the 



494 



WILLS AND INHERITANCE 



beneficiary and if he die before the testator, to his heirs, his 
wife or his next of kin, or to another beneficiary. 

As many other beneficiaries may be named as the testator 
desires. In case the property is to be given in this way it is 
necessary to provide, before using the words of gift, that the 
person is to take the property only if he is living at the time, 
and if not that it is to go to someone else. 

The following is the proper way to make such a provision: 

If Henry Adams shall be living at my death, then I give 
and devise to him and his heirs forever (description and 
location of property), but if the said Henry Adams shall die 
before me, then I give and devise the said property to James 
Green and his heirs forever. 

Or, 

then the said property shall be added to and form a part of 
my residuary estate. 

In case of a trust the same trustee may be named, and 
simply directed to pay the income over to the second legatee, in 
case the first beneficiary is dead at the time the will takes effect. 

If the residuary estate is not disposed of by will, it would 
be distributed as if there were no will according to the laws 
of the state. 

It is said to be the custom at lawyers' dinners to toast the 
man who makes his own will, as such a course usually results 
in much profitable litigation. 

Notes: 

I. If possible, avoid complex and long-term disposi- 
tions of property. 

Employ a competent lawyer and make sure that he 
knows what property you have and what you wish 
done with it 

If you change your residence after making a will, 
be sure to see that it complies with the law of the 
new state of residence or else make a new will. 



2. 



3. 



HOW TO MAKE A WILL 



495 



A simple will leaving property outright to members of your 
own family might safely be drawn in accordance with the rules 
laid down here, but, unless the disposition of the property is 
very simple, as in the case of the Harriman will, the best thing 
to do is to consult a reliable lawyer. It is impossible to give 
all the details of the local laws relating to wills in a work of 
this scope. 

§ 44a. How to Dispose of Real Property 

There are various ways in which a person may dispose of 
his real property by will after his death. He may give it to 
someone outright; or to one person for life, and absolutely to 
another at the first person's death; or to several people in 
succession for life, and to another absolutely on the death of 
the last person. 

The proper form of words for giving property outright is: 

I give and devise (description and location of property) 
to my nephew, John Smith, of Arlington, New Jersey, and 
his heirs forever. 

The proper form of words to give property for life is: 

I, Mary Green, give and devise (describe property fully) 
to my brother, Henry Adams of Syracuse, New York, for 
his life, and upon his death I give and devise (naming the 
property) to my son James Green and his heirs forever. 

It would be perfectly proper to direct that on Henry 
Adams's death the property shall go to another (in some states 
to several others) for life before giving it finally to James 
Green. In New York there could be only two persons to have 
it for life altogether, and if more were named, James Green 
would get it on the death of the second. The persons named 
must, however, be living at the death of the person making the 
will. One could not leave property for life to a child unborn 
at the time of one's death. If no one is mentioned to whom 



496 



WILLS AND INHERITANCE 



the property is to go at the conclusion of the last life estate, 
it will then go to the legal heir or heirs. (See § 431. ) 

The property may be given to one person for the life of 
another. In that case the will would read thus: 

I give and devise (description and location of property) 
to my brother Henry Adams, during the life of my son James 
Green, and upon James Green's death I do give and devise 
said property to my grandson Samuel Brown, to him and 
his heirs forever. 

If Henry Adams should die before James Green, the right 
to make use of the property during the rest of James Green's 
life would be regarded as personal property, and Henry 
Adams could leave it by will or the law would dispose of it 
as explained in § 432. Upon James Green's death the property 
would go to Samuel Brown outright. 

Property, as a usual rule, could be left in this way only 
during the life of one persoa 

But the proceeds of property may be accumulated for a 
child and not paid over until he becomes of age. A good 
direction for an accumulation would be as follows: 

I hereby give and devise (description and location of 
property) to my grandson Samuel Brown, to him and his 
heirs forever, and I direct my executors to hold the said 
property and to accumulate the rents, issues, and profits 
thereof, until my said grandson shall come of age, and at 
that time to pay the same over to him. 

It is also possible to leave property to one person or to a 
tnist company in trust for another. The trustee in whose care 
it is left manages it and pays over the proceeds to the person 
to whom they were given, and accounts to the court for his 
dealings with the trust property. 

The proper form of words to create a trust is: 

I hereby give and devise to Henry Adams (name and 
description of property), to him and his heirs and succes- 



HOW TO MAKE A WILL 497 

sors in trust, to collect the rents, issues, and profits and to 
pay them over to James Green. 

James Green cannot dispose of the property itself but only 
of the proceeds. Henry Adams cannot make use of the pro- 
ceeds, but may do all necessary things with reference to the 
property, such as leasing it. He may be held accountable, 
however, by James Green for any breach of trust or negligence 
in his management. 

In order to be sure as to just what can be done with prop- 
erty, it is necessary to consult the real property law of the 
state where the property is located, as the provisions vary 
slightly in the different states. 

The creation of trusts is highly technical and should not 
be attempted save under the advice of a competent lawyer. 

If you desire to leave real property to charitable organiza- 
tions, including schools and colleges, it is necessary to consult 
the law of the state where the property is located to find out 
whether you can so leave it, and, if so, with what formalities 
you must comply ; and the law of the state where the organiza- 
tion is located to see whether it can take the property. ^ 

Note: 

I. In devising real property it should be described so 
completely that it will be certain as to what is in- 
cluded; and to avoid mistake its location should 
be given definitely. 



§ 443. How to Dispose of Personal Property 

In disposing of personal property, one may either leave a 
certain amount of money to a person, or may provide that 
some specific piece of personal property, such as a piece of 
jewelry or an article of furniture, or some special stock or 
bonds, shall be given him. 

Where a specific piece of property is given to anyone, any 



49« 



WILLS AND INHERITANCE 



debts will have to be paid out of the other personal property 
hrst. If there is not enough of this other personal property 
to pay the debts, the specific property will be sold. 

On the other hand, where amounts of money are left to 
particular persons, any personal property not specifically given 
to anyone will be sold in order to get funds to pay the legacy. 
The debts will be paid out of this property first, and if there 
IS not enough of it to pay both the debts and the legacies, those 
to whom money has been left may get nothing. 

The proper form of words to use in making a gift of 
personal property by will is; 

I give and bequeath (description of the personal 
property) to so-and-so. 

The will may provide that in case the person to whom the 
gift IS made is dead at the time the legacy takes effect, another 
person is to have the property, or that the gift shaU be added 
to and form a part of the residuary estate. Or the will may 
provide that the person named is to have the property only 
under certain conditions, and in case these are not fulfilled it 
is to go to someone else. 

Personal property may be left in trust; then the trustee has 
control of the property and pays over the income as described 
m § 440. 

Before making a will of personal property, the testator 
should consult the personal property law of the state where 
he resides, and if he moves to another state at any time his 
will must be changed to conform to its laws. 

Note: 

I. Generally people err who tie up property for long 
periods after they have gone. It is a form of 
egotism that leads a man to try to impose his 
control on those he leaves behind. 



HOW TO MAKE A WILL 



499' 



§ 444. The Residuary Clause and Its Uses 

It frequently happens that a person has more property 
when he dies than he had at the time he mad 2 his will. Or it 
may happen that- the person to whom personal property has 
been left dies before the will takes effect, thus leaving that 
property undisposed of. A convenient way of providing for 
either of these contingencies is to make a general clause at the 
end of the will covering all such property and providing to 
whom it shall be left. 

This is called the "residuary clause" and the person 
designated is called the "residuary legatee." It is usually ex- 
pressed in this way: 

All the rest, residue, and remainder of my estate I give, 
devise, and bequeath to so-and-so. 

This covers both real and personal property that may have 
been left undisposed of when the time comes to put the will 
into operation. It is usual to leave the residue to near rela- 
tives or to the principal beneficiary of a will. 

If the residue were not left specifically, it would have to 
be distributed as provided by the state laws governing dis- 
tribution. 



Note: 



I. 



The residue of an estate may amount to a consider- 
able sum, and it is important to make careful 
disposition of it in the residuary clause. 



§ 445. What to Do With the Will 

"When a will is made, in order to avoid a possible long 
and trying search for it, it is advisable to file it in a sealed 
envelope with a bank or trust company in the state ; or it may 
be deposited for safekeeping with any County Clerk or Sur- 
rogate, or with the Register of Deeds in the county in which 



Soo 



WILLS AND INHERITANCE 



IJn fi^ u " «"'*='-»"y « ?'«« inconvenience to have 
a wiU fUed ,n the maker's safc^eposit box. for when a person 
dies, no one is entitled to have access to his safe-deposit box 
except his legal representatives duly appointed by the court 
Who such representatives are cannot be determined untU the 
will IS found. In order to obtain the will, it is therefore 
necessanr to get an order from the court permitting the open- 
ing of the safe-deposit box for the purpose of discovering the 
aocument." ^ 



Review Questions 



I, 



3. 



4. 



5. 



"^nvlZr^" ',o" T ^'^ ^'^^^^ °^ '"^"^^^ ^^^^"-^^ would 
invalidate a will? Is it easy "to break" a will? 

Is the right to make a will a natural right? What restrictions 
on the right are found in your state? 

What is the rule as to paying a decedent's debts? If the bene- 
ficiary dies before the testator, what happens to the legacy? 
How may this be avoided ? ^' 

What number of witnesses is required in your state? When 
where, and how must witnesses sign a will ? 

What is a will ? What is a nuncupative will ? What is a holo- 
graphic wi ? Draw a brief form of will leaving all property 
to wife. Why IS It safer to have a competent lawyer drVw a 

6. What are the functions of an executor? Of an administrator? 

7. Does the law of a place where the will is made affect it? If a 

testator lives in Ohio and owns land in Pennsylvania,' which 
law would govern his will? 
a What would be done with personal property owned by a testator 
but not mentioned in his will ? 

^ "i."" '^TI « sole legatee of personal property, does he own 

It? What defines the powers of trustees under a will? 
^^' ^^^^ 's a residuary clause? A residuary legatee? 

-Why You Should Make . Win." Guaranty Trim Company of New York. 



CHAPTER LXV 

HOW TO CHANGE OR TO REVOKE A WILL 

§ 446. How to Change a Will 

H It is desired to change a will, changes should not be 
made in the instrument itself. Any erasures or interlineations 
are likely to make the will invahd. No changes or alterations 
will take effect unless it can be proved that they were there 
when the will was originally signed. If there are any erasures 
or interlineations in a will, the attestation clause should state 
that they were made before the will was signed. 

The proper way to change a will is by drawing up another 
paper called a codicil in the same form as the will itself except 
that it states that: 

I, John Smith, of 206 Lexington Avenue in the Borough 
of Manhattan, City, County, and State of New York, on 
the 3rd day of January, nineteen hundred and twenty, do 
hereby publish and declare this codicil to my Last Will 
and Testament which is dated February 4, 1919, and in 
manner and form following: .... 

The codicil must be signed, sealed, and declared to be such 
in the presence of witnesses, in the same way as the original 
will, and these witnesses must be asked to sign and must state 
their addresses. 

If it is desired simply to add something, the codicil pro- 
ceeds in the same way as the original will. If it is desired to 
make a change in any provision of the original will, the para- 
graph in which the provision occurs should be referred to. 
For instance: 

501 






502 WILLS AND INHERITANCE 

Whereas in paragraph two of my said Ust Will and 
Testament, I did give and devise certain real property to 
my son, Peter Lane, I do now revoke said gift and do 
hereby give and devise the said real property to my nephew, 
Richard Lee, to him and to his heirs forever. 

§ 447. How to Revoke a Will 

A wiU may be revoked only by the action of the testator 
himself. He may direct someone else to perform the actual 
operations for him. 

No destruction or other unauthorized interference bv any 
other person will prevent the will from taking effect. If the 
will is partly or entirely destroyed, it may be proved by the 
testimony of witnesses, or of the lawyer who drew the will. 

H the testator attempts to alter a will by making erasures 
or interlineations, he may revoke it without intending to. 

The proper way to revoke a will is for the testator either 
to destroy or to cancel it by making some mark or tear in it, 
or by making a new will stating that the former one is revoked. 

A codicil may be revoked in the same v/ay. If a codicil 
is to be revoked, the whole will had better be executed again, 
since by revoking a codicil the clause affected in the original 
will may not be revived. 

A radical change in circumstances, such as the birth of 
issue after testator's death, may have the effect of revoking 
his will unless the will states that it should not be revoked by 
such changed conditions. 

The safest way to revoke a will is to destroy it entirely 
and make a memorandum of the fact. Otherwise it may be 
supposed to be lost or wrongfully destroyed by some unau- 
thorized person. If it remains in your possession during your 
lifetime, and after your death is proved by your executors or 
administrators, and a later will is lost, it may take effect. 
Provision should always be made in the first clause of a will 
that all former wills are revoked. 



CHANGING OR REVOKING A WILL 

Review Questions 



503 



I. 

2. 

3. 
4. 



How should a will be changed? 

May any of the formalities necessary to the execution of a will 

be omitted in the execution of a codicil ? 
How should a will be revoked ? 
If a will is accidentally lost or destroyed before or after the 

death of the testator, and the lawyer who drew the will has 

a copy, can it be probated? 
If a codicil is revoked, why should a new will be made? 



CHAPTER LXVI 

OTHER WAYS OF DISPOSING OF PROPERTY 

AFTER DEATH 

S448. Deeds of Trust 

By making a deed of trust it is possible to avoid the neces- 
sity of drawing a will and incidentally the necessity of settling 
up the estate. Such an instrument which conveys the property 
to a trust company or other trustee in trust, provides that the 
person deeding the property is to have the use of the profits 
of h,s own property during his lifetime, and then disposes of 
It after his death to the various persons whom he selects as 
benenciartes. 

By such a deed of trust the person may make himself 
trustee for his hfe and thus leave the management of the 
property m his own hands. The objection to such a disposi- 
tion is that it makes it difficuU to sell any of the property, since 
purchasers will usually want a release from the persons who 
are to take the property after the trustee's death. 

This may be avoided by providing in the deed of trust that 
the person making it reserves the right to revoke or to change 
the whole or any part of it at any time. He may then revoke 
and change part of it whenever he wishes to dispose of any 
property during his lifetime. Of course, there is the trouble 
and the.expense of drawing a new deed or making amended 
deeds whenever this is done. If the person owed money or 
afterward got into debt, such a deed of trust would be of no 
effect Any arrangement of the kind would have to be worked 
out under competent legal supervision. 

S04 



OTHER WAYS OF DISPOSING OF PROPERTY 505 

§449. Gifts in View of Death 

A person who believes himself incurably ill and at the point 
of death, may make gifts to take effect upon his death. If 
the testator should recover, the gifts would not take effect. 

In order to make gifts of personal property effective, the 
property itself should be handed to the person to whom it is 
to be given either by the testator himself or by someone else 
at his direction, if possible. If the gift consists of a bulky 
article, something to represent it may be given. For instance, 
the key of a trunk or of a chest might be handed over. The 
gift of a savings bank book amounts to a gift of the bank 
account. A gift may be described as a gratuitous transfer of 
personal property. 

Note: 

I. Property given in view of death must be actually 
handed over. A promise to make a gift is not a 
gift causa mortis and cannot be enforced. 



I. 



Review Questions 

How may a deed of trust be made so as to give the donor the 
use of the property during his life and have it pass to his 
beneficiary when he dies? 

Would such an arrangement prevent creditors from collecting 

their claims? 
What is a gift? What is a gift rai/^a wor/wf Can a promise to 

make a gift be enforced? Why not? 



ilj, 



THE SETTLEMENT OF AN ESTATE 



507 



CHAPTER LXVII 

THE SETTLEMENT OF AN ESTATE 

§ 450. If the Deceased Person Left a Wm 

If the deceased person left a will, the first thing to do 
would be to probate the will. If the deceased left any personal 
property, the will must be probated in the state of which he 
was a resident when he died. Probating a will means that it 
must be presented and proved in a special court called a pro- 
bate, surrogate's, or orphans' court. Any person designated 
m a wiU as executor, devisee, or legatee, or any other person 
interested m the estate, or a creditor may ask that a will be 
probated. 

^ Notice must be given of the probate to everyone who re- 
ceives anything under the will, and to everyone to whom the 
law would have given the property had there been no will 
(see §§ 431 and 432). This is expressed sometimes as "every 
person interested," which would include every person entitled 
to share in the estate or the proceeds thereof, as husband, wife, 
legatee, next of kin. heir, devisee, assignee, grantee, or other^ 
wise. Usually the procedure incident to probate requires the 
aid of a lawyer. 

The witnesses to the will itself, or at least some of them, 
are always examined as a matter of formal proof before ad- 
mitting the will to probate. If there is a contest, the testimony 
of thejawyer who drew the will and of anyone familiar with 
the circumstances may be given to prove it, or to prove the 
testator's mental capacity at the time it was drawn. It is the 
duty of the person offering the will for probate to obtain the 
necessary testimony. 

506 



If the probate of the will is contested, those who oppose 
its admission to probate will be heard and sometimes contested 
will cases run on to great length and cost. After both sides 
have been heard and the case has been argued, it is decided by 
the surrogate or probate judge, who will, unless there is good 
cause for rejection, make a decree admitting it to probate as a 
valid will. 

When there is no contest, all concerned sometimes consent 
to the probate to save time and the will is admitted forthwith. 

An executor is an individual or a trust company which by 
designation of a will is to carry it into effect If the will is 
admitted to probate, the executors or executor named, if com- 
petent, will receive letters testamentary from the court. "Let- 
ters testamentary" is the legal term for the instrument issued 
by a probate court authorizing an executor to carry out the 
provisions of a will. A minor, an alien, a criminal, or anyone 
mentally or morally deficient would not receive letters. An 
executor derives his powers from the will, but cannot act until 
he receives letters from the court of probate. 

Where a long contest over the will is likely, a temporary 
administrator pendente lite, i.e., pending the litigation, is ap- 
pointed. It is his duty to attend to all matters concerning the 
estate that would suffer by delay. A temporary administrator 
may be appointed in any case when it is necessary. 

If personal property of the deceased is situated in other 
states, it may become necessary to take out letters of adminis- 
tration in those states also. These are called "ancillary let- 
ters." In every state the detail of settling an estate is regulated 
by statutes which should be consulted. 

If the will does not provide that the executor is to serve 
without giving bond, he will in many cases be required to give 
a bond in double the amount of the property belonging to the 
estate and with a certain number of sureties, before letters will 
be issued to him. In New York this is a matter of discretion 



\f 



¥\ 



ti I 






WILLS AND INHERITANCE 



THE SETTLEMENT OF AN ESTATE 



with^ die surrogate. It is the duty of the executor to take the 
official oath and to file his bond promptly. 

Out of the first claims to be paid will be the inheritance 
tax If there is one. Each state allows a certain amount of 
exemption of property left to near relatives. The statutes 
should be consulted to find out what their rights are. 

It will usually be necessary to have the property' appraised 
by one or more disinterested appraisers to ascertain the amount 
of the inlieritance tax. Unless the will provides that the in- 
heritance tax is to be paid out of the estate, it must be paid 
out of the property going to each individual beneficiarv If 
the beneficiary does not want property sold to pay the tax 
he may pay the tax out of his own pocket and take the article 
left him as it is. 

An executor is not bound to serve and where the executor 
named m the will fails to qualify, the law appoints the person 
most interested in the estate, usually a relative, as an ad- 
mmistrator cum testamento annexo (with the will annexed) 
After his appointment his duties are precisely those of an 
executor. He sees that the provisions of the will are carried 
out. Commissions based on the amount of estate actually 
received and paid over are allowed by law. 

§ 451. If the Deceased Person Did Not Leave a Will 

If there was no will the facts of death and intestacy must 
be proved and then the nearest relative entitled to a share 
m the estate (see §§ 431 and 432) may be appointed adminis- 
trator. Where several persons are thus entitled, such as 
children, brothers and sisters, nephews and nieces, etc men 
will be preferred to women, and unmarried women to married 
women. All of the persons so entitled may be appointed ad- 
mmistrators together, or, by the consent of all who are in anv 
way interested, an outside person may be appointed. 

If no one else takes out letters of administration and there 



509 



arc any debts or claims against the estate, a creditor or a 
claimant is entitled to letters of administration. 

An administrator will always be required to give bond with 
sureties in double the amount of the property belonging to the 
estate, to guarantee that he will faithfully perform his duties. 
His commission is the same as that of an executor. 

The duties of an administrator are to advertise for claims 
against the estate, to pay those which seem proper and to 
reject the others, leaving them to be settled by suit ; and finally 
to distribute the property to those persons who are entitled to 
it according to law. 

The administrator should at once ascertain and settle all 
the inheritance taxes and make claims for exemptions due 
anyone interested in the estate. As a usual rule, the estate 
must be appraised by one or more disinterested appraisers for 
the purpose of ascertaining the inheritance tax. 

The executor or the administrator is bound, if assets will 
permit, to perform the contracts of the deceased in so far as 
they do not call for the personal qualities of the deceased. If 
he continues a business in which the deceased was engaged, he 
must account for the profits, if any, but must himself assume 
the losses of a continuance in business, unless the will provides 
that such possible losses may be paid out of the estate. 

If the property is located in several states, it may become 
necessary to take out letters of administration in each one. 
Generally the courts prefer to give such letters to a resident of 
the jurisdiction where they are granted, but a relative would 
have a right to letters even in a foreign state if he were entitled 
to the property by the law of that state. 

Notes: 

I. An administrator should be careful to get vouchers 
or releases from those to whom he distributes the 
property under the law. 



m 



5IO WILLS AND INHERITANCE 

2, The advantages of administration by a trust com- 
pany are considerable. 

§ 45a. Settlement Without Administrator 

When there are no creditors, the heirs or next of kin may, 
by private agreement, settle the estate without taking out let- 
ters of administration/ 

Each one who would be entitled to a share under the laws 
of the state should give a release of his share somewhat as 
follows : 

I, the undersigned, being entitled to a certain share in the 
estate of my father, James Smith, late of Ithaca. New York, 
do hereby in consideration of (here specify money or prop- 
erty received from the estate) release and relinquish all my 
right and interest in and to the said share. 

Witness my hand and seal this ist day of February. 1920. 

(Signed) John Smith (l. s.) 
Attest: 

Irvin Reynolds. 

If there are stocks and bonds which must be transferred 
on the books of the respective companies, it will be necessary, 
as a rule, to take out letters and to furnish the companies with 
certificates of their having been issued. If money belonging 
to the deceased was on deposit in a bank, it could not be with- 
drawn except by a duly appointed executor or administrator. 

In difficult situations, executors or administrators may ask 
the court that appointed them to instruct them or to make 
an order in the particular matter that would relieve them from 
personal responsibility. 

Where there are several executors or administrators, the 
fact that one or more becomes incapable does not prevent 
any survivor or survivors from completing the settlement of 
the estate. 



Chauvit V. Ives. 173 N. Y. 19a, 198. *-«iy»ra ▼. uuii. 119 \. Y. 6a. 72; 



THE SETTLEMENT OF AN ESTATE 



511 



Where the executors or administrators do not complete 
the settlement of the estate, the court will appoint an ad- 
ministrator de bonis non, that is, for the goods not admin- 
istered, to complete the work. 



Review Questions 
(The answers to these questions should conform to local statutes.) 

1. What do you understand by probating a will? Where is a 

will proved? Who must be notified? 

2. What is the function of an executor? Whence does he derive 

his authority ? Explain fully. What are letters testamentary? 
What are letters of administration? What does an executor 
do to qualify? 

3. What is an administrator pendente litef 

4. When can an estate be settled out of court? 

5. When there is no will, what is the usual procedure? In such a 

case who will be appointed administrator? 

6. What are the general duties of an administrator? 

7. What are the responsibilities of an executor or an administrator, 

if he continues a business belonging to the estate? Has an 
administrator any authority outside of that given him by 
the court? 

8. To whom is a petition for appointment of an administrator 

addressed ? 

9. What are the general duties of an administrator pendente lite? 

10. What is done when property belonging to the estate is in an- 

other state? 

11. What is an administrator de bonis non? 



EXECUTORS AND ADMINISTRATORS 



513 



I 



CHAPTER LXVIII 

DUTIES OF EXECUTORS AND ADMINISTRATORS 

§ 453- The Procedure of Administration 

No one is compelled to act as executor or administrator 
of an estate. If the person named in a will does not wish to 
act or cannot do the work necessary to settle the estate, he 
should not accept. In case an executor declines, the court of 
probate will appoint some other person or a trust company 
to act 

Any person named as executor in a will may file the will 
for probate if some other interested party has not done so 
already. An executor may pay the funeral expenses before 
the will is proved, but it is usually unnecessary to do this. He 
may also do anything that is really necessary for the preserva- 
tion of the estate. It is not safe to do more than this, for 
until the will has been proved and letters testamentary have 
been issued, the executor has no authority for further action. 

If there is more than one executor they can act independ- 
ently except in the sale of real estate, if diey should be author- 
ized to sell real estate. 

§ 454. Inventory 

After being duly appointed, and qualifying and receiving 
letters testamentary, or if there is no will, letters of admin- 
istration, an inventory should be made. The inventory must 
contain a particular statement of all the property belonging 
to the deceased that the administrator or executor has been 
able to discover, with such details as indicate its value for 
coUectibiUty. It is not confined to property in the state of 

5" 



administration. It should not include real estate, unless by 
the will it has been made part of the general estate. The assets 
of the partnership should not be named, but the net balance 
of the decedent's interest, including the good-will, the trade- 
marks, and the secret formulae should be entered. Any rents 
payable at the time of the decedent's death would be included, 
and if any other personal property should come to the knowl- 
edge of the administrctor or executor, this should be appraised 
and filed in an additional inventory. Sometimes this is ex- 
cused in the will. Unless this is the case, it is necessary to 
take an inventory and then have an appraisement made. 

Thereafter, state or federal transfer or inheritance taxes 
should be paid from the first moneys that are realized. Taxes 
or claims due to the government are preferred and have prior- 
ity over everything else, except the expenses of the funeral and 
last illness. 

The debts to the estate should be ascertained and steps 
should be taken to collect them promptly, bringing suit if 
necessary. It is the duty of the executor to collect all claims 
that the estate has against other parties, and to take over all 
the personal assets of the estate and to turn them into cash. 
He is authorized to do this at his discretion to the best possible 
advantage. 

§ 455. Advertising for Claims 

All claims against the estate should be ascertained, and 
this is usually done by advertising and notifying the public 
generally of the fact of administration and that all legal claims 
should be filed with the executor or the administrator. 

It devolves on the executor or the administrator to pay 
the debts of the estate, but it is necessary first to make sure 
that the estate is solvent and can pay all obligations and that 
he can command funds enough to meet these claims. Unless 
he is sure of this he should not pay, for if he did, and there 



514 



WILLS AND INHERITANCE 



I 



was a deficit, he would be personally responsible. For this 
reason the law allows him one year before he can be compelled 
to pay any claims or legacies. 

§456. Paying Legacies 

Specific legacies of personal property may be delivered to 
those entitled to them when it is ascertained that there are 
funds enough to pay all obligations. Generally, if the executor 
pays any legacies before the expiration of the year he does so 
at his own risk and would have to make good if the estate 
proved insolvent. If, however, by the terms of the will the 
executor is directed to pay any legacy before the end of the 
year, he may require the legatee to give bond to refund in 
case of any deficiency of assets to meet debts. 

When the debts are paid he may then pay the general 
legacies. The same nilc holds good as for the debts. He 
must not pay any legacy in its entirety until he is sure he has 
enough to settle with all. If the estate did not net enough 
to pay all general legacies it would be the duty of the executor 
to scale them down equally. Where an estate is solvent and 
there are articles that have personal associations, the next 
of kin will often arrange to distribute these among themselves, 
notifying the executor to deduct a proper amount from the 
legacies or from the amounts that would come to them under 
the distribution. 

§ 457. Caring for Funds 

All funds which belong to the estate should be kept in a 
special bank account, and should not be mingled with the 
executor's own funds or deposited in his own account. If 
they are deposited in a reputable bank in the name of the 
estate, the executor will not be responsible if any are lost. 
Checks and any other instruments to be signed by the executor 
. should be first signed with a rubber stamp as follows : 



EXECUTORS AND ADMINISTRATORS 5x5 

The Estate of Hiram Randolf, 
By ^ Executor. 

Any valuable papers or records coming into the possession 
of the executor should be placed in a safe-deposit box, and 
if there is more than one executor or administrator all should 
have access to the instruments pertaining to the estate. 

§458. An Executor's Authority 

Executors have no authority to make any new contracts. 
It may be their duty to fulfil exirting contracts entered into 
by the deceased, but not to make new contracts or to engage 
in any new business. An executor would be authorized to 
employ an accountant if necessary, or an agent if necessary, 
and he is allowed to employ counsel. The executor is liable 
for the fees of counsel but usually these are allowed him on 
settlement. An executor may incur any expenses necessary 
to preserve or care for the estate. 

He will have charge of all the personal property belonging 
to the estate but not of real estate, unless acting under a will 
that directs an executor to sell real estate, or unless ordered 
by a court to sell real estate in order to pay debts. If the 
personal estate will not cover all claims against the estate in 
full, an order to sell such estate would be made. 

He may sell stocks and bonds, etc., and reinvest the pro- 
ceeds in such investments as the state allows executors and 
trustees to make. Unless the stocks and bonds held by the 
estate are of this class, it would be safest for the executor 
to do this. He has no right to pledge any property in his care 
but has authority to sell it at his discretion. 

An executor would have an authority to carry on a sole 
business conducted by the deceased. An executor would have 
no rights in a partnership business unless authorized by will. 
If be elected to continue a partnership business, although not 



il 



Si6 



WILLS AND INHERITANCE 



SO authorized by the will, he would be primarily liable for 
any losses that m.ght occur. If he were specifically authorized 
to do th.s ,n the *ill. and he lost money, he would have a 
claim agamst the estate for indemnity. 

An executor can compel the survivor of a partnership or 
&e sumvorsto pay out the interest of the testator in a reason- 
able time. The value of the good-will and of the trade-name 
would have to be accounted for as part of the partnership 



Review Questions 



I. 

2. 



3- 

4- 



What are the general duties of an executor or an administrator? 

Jy ,»aSgT"" '° •"'"" appointment? What is meant 
Wtot evidence of his authority must an executor have' 
Under what conditions may a safe-deposit box company give 

access to a box to an executor or an administrator? 

5. After appointment, what are the next three steps? In an 

executors inventory should real estate be included? Prooertv 

Tn^n" "T"l ?^r'' "*"•'"'''' '"'"«' '" 'he business 
and property of a firm? Give rules as to inventories and state 
what they must contain. 

6. What claims are preferred and in what order? 

8. Give the order of payment in the distribution of the estate of 
a decedent in your state. 

lo H,?!l! "'*'" *'■"' ""'' "" '""""' P^'y '««"«■■« '" yo«r state? 
lo. Has the executor any control of the real esute? 

(«) Real estate of a partnership of which deceased was a 
, member ? 

(b) A lease for twenty-one years? 

(c) A right of way? 

(d) Fixtures attached to decedent's real estate and used for 
trade purposes? 

What is an executor's duty in regard to stocks and bonds? 



II. 



12. 



EXECUTORS AND ADMINISTRATORS 



517 



14. 



15 



13. What is the duty of executor of partner as to continuance of 
business of partnership? 

Has an executor a right, ex officio, to examine the books of a 
partnership ? 

Within what period can the executor compel surviving partners 
to pay the interest of testator? 
16. What is the duty of an executor in regard to insuring property 
in his custody? Has the executor of a solvent estate an 
insurable interest in the real estate of decedent? 

Is a judgment against an executor a lien on real property of 
the estate? 

If an executor has been ordered to pay a legacy but fears he 
will not have enough to pay debts, how may he protect him- 
self? 

To what class, realty or personalty, does rent of real estate 
belong, if it become due before decease but is collected 
after? 

Decedent's mortgaged property is foreclosed after decease. Sur- 
plus, turned over to estate, belongs to what class of property? 

If a decedent had contracted to sell real estate, and the purchase 
money remains unpaid at his death, to what class of property 
does this unpaid purchase money belong? 



17 



18. 



19 



20. 



21. 



I 



CHAPTER LXIX 

QUESTIONS BETWEEN LIFE TENANT 
AND REMAINDERMAN 

§459- How Conflicting Rights Arise 

Some difficult questions in the settlement of an estate 
come up in the conflict of interest between the life tenant and 
the remainderman. If by the terms of a will $40,000 in 
stocks and bonds and a well-located store building are directed 
to be held in trust to pay the income in quarterly instalments 
to the testator's daughter, Ethel Cole, and at her death to 
be sold and distributed to aU his children or their issue per 
stirpes, in such case Ethel Cole, the daughter named, would 
have the benefit of a life estate in both the real and the per- 
sonal property with the remainder to the heirs of the testator. 

The following questions might arise: 

I. Profits on Reinvestments, It may be the duty of the 
executor to sell the stocks and bonds and reinvest the proceeds. 
In doing this there might be a profit. If so, that profit is 
held to belong properly to the corpus of the estate and no part 
would go to the holder of the life interest. She would, how- 
ever, benefit by the increased value of the new investments on 
which she would have the income for the term of her life. 

2. Stock Dividends or Unusual Cash Dividends, Again, 
on some of the stock there might be a stock dividend or an 
exceptional cash dividend. In such a case, the general rule 
in this country is that if part of the value so apportioned 
accumulated before the life interest began, such part would 
be held to be principal and not income and would be reserved 
for those entitled to the remainder. The life tenant mean- 

518 



LIFE TENANT AND REMAINDERMAN 



519 



while would be entitled to any interest arising from this 
amount. That is, the court will inquire as to the time when 
the fund was earned or accumulated, and it will be divided 
according to whether it accumulated in the lifetime of the 
testator in which event it goes to the remainderman, or after 
his death in which event it goes to the life tenant. 

In Massachusetts, Georgia, and Rhode Island, a different 
rule prevails, and all cash dividends whether large or small 
are regarded as income and belong to the tenant for life. 
Stock dividends, on the contrary, are regarded as principal and 
are held for those entitled to the remainder. The life tenant 
would, of course, have the income until the life estate ter- 
minated. This last rule is simple but at times unfair, and 
the courts do not always adhere to it rigidly. 

3. Subscription Rights, Another case is where a cor- 
poration issues new stock or bonds and gives to the present 
stockholders the right to subscribe at par or at less price 
than outsiders. In some corporations these rights are 
very valuable. It has been held that the value of the right 
would belong to the corpus of the estate. It would be the duty 
of the trustees to sell the right on the best terms possible 
and then invest the amount so received, giving the life tenant 
any income from such investment, but holding the principal 
for the remainderman. 

4. Expenditures on Real Estate, In regard to the real 
property, the taxes, water rates, interest on any mortgage or 
encumbrance, and necessary repairs would all be at the charge 
of the life tenant and would have to be paid and deducted 
from any rents arising from the property. In case it should 
become necessary to pay off a mortgage or to pay a consider- 
able assessment for street improvements, the case is more 
complicated. The usual rule is to take the tables of mortafity 
and to ascertain the expectation of the life of the life tenant. 
Then a calculation is made as to the advantages which will 



S20 



WILLS AND INHERITANCE 



arise from her being relieved of the payment of interest on 
the amount involved for the balance of the life estate. If, 
for example, the incumbrance or assessment which is to be 
paid off amounts to $10,000, and the current rate of interest 
IS 5 per cent, the share chargeable to the life tenant is the 
present worth of an annuity of $500 (the interest for a year 
on the mortgage), for the number of years during which 
the mortality tables show she is likely to enjoy the increased 
income. 



Review Questions 



I. 
2. 



3. 



What is a life tenant? What is a remainderman? 
When a fund is to be invested and interest, dividends and income 
are to be applied to the use of a beneficiary for life does 

a profit from the sale of stock belong to the life ten^t or 

to the corpus of estate? 
Does a dividend on stock, declared before a testator's death 

become a part of his estate or does it belong to the life tenant 

as income? 

4- How would a stock dividend be apportioned between the life 

tenant and the remainderman in your state? 
S Do proceeds of sale of rights to subscribe to new stock go to 

life tenant or to body of estate? 
6. Is a local assessment for improvement apportionable between 

life tenant and remainderman? 



CHAPTER LXX 

INTERMEDIATE AND FINAL ACCOUNTS 

§460. The Obligation Account 

The obligation to account rests on all administrators, 
executors, trustees, and guardians. The account required may 
be defined as an orderly statement, duly verified and supported 
by vouchers, of the trustee's dealings with the funds and 
property of the decedent. It must show all receipts and 
expenditures grouped according to their character, and must 
show correctly the balance remaining for distribution or to 
be held. It must show any increase in value or any deprecia- 
tion. An accounting is a judicial scrutiny of such an account 
in open court, subject to the adverse criticism or claims contra 
of any legatee or devisee whose rights may be affected. 

§461. Kinds of Accounts to be Filed 

An executor's account may be intermediate or final. 

An intermediate account is one filed during the administra- 
tion as a report of progress. It discloses the condition of the 
estate at the time of the report. 

A final accounting is one that is capable of being judicially 
settled. Such an accounting may be settled for certain pur- 
poses only, or for all purposes. 

An executor's account may also be voluntary or compul- 
sory. A voluntary account is one rendered by the executor 
or administrator on his own initiative. An executor or an 
administrator at any time may file such an account, verified 
with proper vouchers. A compulsory account is one at the 
instance of some person entitled to require it or under the 

521 






$22 



WILLS AND INHERITANCE 



direction of the probate judge. When an account has been 
judicially settled, it is conclusive upon all parties concerned. 

§462. Final Accounting 

In New York an executor or an administrator may volun- 
tarily file a final accounting one year after letters testamentary 
have been issued to him, and after aU creditors and persons 
having claims against the estate have been notified by publica- 
tion according to law to present them. In such case he will 
ask that all persons with unsettled claims be cited, and that 
the husband or the wife of the deceased and the next of kin 
must be cited. Any person interested may contest an account- 
ing so far as it affects his interest. 

The probate court may compel a final accounting after one 
year or when letters testamentary have been revoked, or where 
pursuant to a decree real estate has been sold, or where the 
will has provided that the executor take some action concern- 
ing real estate. A creditor, a legatee, a surety on the bond 
of the administrator, or a coexecutor may ask for the final 
accounting. All persons interested must be cited to attend. 

§ 463. Preparing Accounts 

In preparing an account, it is easiest to follow some prec- 
edent which has been handed down by some court or some 
set and certain method by which it is to be filed. In some 
cases complete forms are provided by the probate courts.* 



INTERMEDIATE AND FINAL ACCOUNTS 



523 



3. What is an intermediate account? What is a voluntary account? 

4. When may an executor or an administrator voluntarily file an 

intermediate account? 

5. When may an executor voluntarily present his final account and 

ask that the same be judicially settled? 

6. When is an account judicially settled? 

7. Should the proceeds arising from a mortgage, lease, or sale of 

real property under a surrogate's order for payment of debts 
and funeral expenses be included by an executor in his account 
of proceedings? 



Review Questions * 

1. Why must all who occupy positions of trust render an account? 

What must an executor's account contain ? 

2. Who may caU for an account of an administrator of an estate? 



RIGHTS WHERE THERE IS NO WILL 



52s 



^11 



CHAPTER LXXI 

RIGHTS IN PROPERTY WHEN THERE IS NO WILL 

§ 464. In the Case of Real Property 

If a person dies without disposing of his real property by 
will, those persons mentioned in § 431 become entitled to it. 
Real property, unlike personal property, becomes the property 
of the heirs on the owner's death without any further action. 
Realty is liable for debts only in case there is not enough 
personal property to pay them. As a rule some action must be 
brought by the creditor against the heir before real property 
may be sold. 

One obligation that must be met before the heir can take 
possession is the payment of any transfer or inheritance taxes 
on the property. This tax must be paid or the property will 
be sold and the tax collected out of the proceeds. If not thus 
sold, the title is not marketable until transfer taxes are paid, or 
record made that it is exempt. 

§ 465. In the Case of Personal Property 

If a person dies intestate leaving personal property, an ad- 
ministrator must be appointed. Those persons named in § 432 
as being entitled to the personal property are respectively en- 
titled to the administration of the estate. If no one else who 
has a better right makes a move to take out letters of ad- 
ministration, one of the relatives who has a right to a share 
in the personal property may notify the others and apply for 
letters himself. 

Any inheritance taxes are deducted from the share of each 
person. . Near relatives are entitled to a certain amount which 

524 



is exempt from tax. The state and the federal law must be 
consulted to ascertain the inheritance taxes and any ex- 
emptions. 

§ 466. Rights of a Husband or a Wife 

After her husband's death a wife is entitled under the 
common law for the remainder of her life to the use of one- 
third of all the real property which her husband owned during 
their marriage. This is her right of dower, which cannot be 
taken from her by any means except by her own signature to 
a deed, or a release, or an agreement made at or before mar- 
riage. If the property has been left to someone else by will, 
it is subject to this right, and the person receiving it must 
either give the widow the use of one-third of the property or 
settle with her in money for it. The same is true where there 
is no will. The heirs must settle with the widow for her 
dower right. 

The widow may appear in court at the time of the settle- 
ment of the estate and claim her dower right. Or, if it is 
denied her, she may bring an action to enforce the right. 
Where the property is distributed by law, the law usually 
provides a certain length of time within which those who take 
the real property must settle with the widow for her dower 
rights. 

If a child has been bom alive, a husband has a right to a 
life estate in all of his wife's real property. In many states 
today, however, she can^cut off this right of curtesy by selling 
the property during her lifetime, or by leaving it to someone 
by will. 

Where a husband has the right of curtesy, another person 
entitled to the wife's property gets it only after the husband's 
death. The husband has the same right to enforce his right 
of curtesy that a woman would have in case of dower. 

Where a person dies without leaving a will the husband 



526 



WILLS AND INHERITANCE 



it 



(I 



I, 



or the wife has those rights in personal property granted by 
the state law (see § 432), and may enforce them in the same 
way as has been described in § 469. 

Either husband or wife may lose all rights in the estate by 
delaying to enforce them. Claim should be made promptly of 
the executor or the administrator with the will annexed, or 
of the heirs, if the person died without leaving a will. 

§ 467. What Creditors Must Do 

AU creditors should present their claims against an estate 
promptly. If there is no move to administer the estate, any 
creditor has a right to serve notice on the relatives and the 
other persons interested and to apply for letters of administra- 
tion. If no one else appears and qualifies, the administration 
of the estate is granted to him. He is obliged to give the 
usual bond with the number of sureties required by law, and 
in double the amount of the property belonging to the estate, 
to administer it faithfully. 

If a creditor fails to read the notice and to present his 
claim within the time limited by law, he may lose the claim 
altogether. If the debtor has died without the creditor's 
knowledge, the latter's failure to present his claim on time 
may lose him his rights. If the claim is not presented within the 
time limited by law, the executor or the administrator after 
due notice may pay legacies or distribute the estate in his 
hands, and creditors lose all claim against the executor or 
administrator. They may, however, in such case attempt to 
collect from some of the legatees who have already been 
paid. 



Note: 



1. 



When a customer dies in debt to a business house, 
the collection department must inform itself and 
act promptly. 



JRIGHTS WHERE THERE IS NO WILL 

Review Questions 



527 



I. 



2. 



When may real property belonging to an estate be sold to pay 

debts? 
Who may take out letters of administration when a man dies 

intestate ? 

3. What rights in your state has a husband or a wife in the real 

estate of the other? 

4. When and how should the rights of dower and curtesy be en- 

forced ? 

5. In what order are the debts of the deceased usually paid? 

6. What are the rights of creditors generally against the estate? 

7. What are the rights of a creditor holding insufficient collateral 

against an insolvent estate? 

8. If a creditor's claim against decedent is not presented within 

one year, what would be the effect? 



CHAPTER LXXII 

RIGHTS IN PROPERTY LEFT BY WILL 

§ 468. If Real Property Has Been Devised by WUl 

If real property has been left by a will which did not pro- 
vide that the inheritance tax was to be paid out of the funds 
of the estate, the party to whom the realty was left will be 
obliged to pay the inheritance tax, if there is one, before he is 
entitled to receive the property. A near relative, a husband, 
wife, father, mother, child, brother, or sister, would probably 
be entitled to some exemption. That is, a near relative is 
entitled to receive property worth a certain amount without 
paying any tax. After the specified amount has been reached, 
the tax is levied at a certain percentage, which is generally 
less than it would be for persons not related at all to the 
deceased. 

In order to determine what, if any, rights to an exemption 
exist and whether there is a tax due at all, it is necessary to 
examine the inheritance laws of the state where the real prop- 
erty is located. 

§ 469. M Personal Property Has Been Left by Will 

The statement made in the last section may also apply to 
personal property. To find out whether there is an inheritance 
tax, and if so what exemptions may be claimed, one must con- 
sult the law of the place where the maker of the will had his 
residence at the time of his death. There may, however, be 
further taxes on the transfer of stocks and bonds under the 
laws of the states where the companies are located. In the 
case of these latter taxes no exemption is allowed. 

A person who would have a right to a share in the personal 

528 



RIGHTS IN PROPERTY LEFT BY WILL 



529 



property if there were no will is entitled to be present at, and 
to be notified of, any contest of the will. He may be rep- 
resented by his lawyer or he may contest the will himself if he 
thinks there is good cause. 

A person is entitled to a transfer from the executor or the 
administrator of any stock certificates or bonds left him by the 
will, and may then have new certificates issued to him on the 
books of the respective corporations. 

§ 470. Contesting a Will 

If any contest is made about the probate of a will, all the 
evidence to prove the validity of the will must be brought in. 
Everyone interested must have notice of the commencement 
of any action to contest the will, and all such persons are 
entitled to be present at the trial and to be represented by 
counsel. 

If property is left to a person by one will, and another 
of later date is offered for probate by which the bequest is 
either diminished or left out altogether, it is not wise to 
contest the last will unless there is clear evidence to prove 
that the testator was so mentally weak as to be unable to 
realize the nature of his acts and the value of his property 
at the time he made the will, or that he had an insane and 
unfounded prejudice against the person whose legacy was 
reduced or cut off. 

If a will is contested, the person who would inherit the real 
property if no will existed is entitled to notice of the action 
to contest it and is entitled to be present in court and to be 
represented by a lawyer. He may bring in witnesses to dis- 
prove the will or the testator's mental capacity. (See § 434 
on capacity to make a will.) 

Undue Influence, Undue influence, on which ground so 
many contests are made, must have been an influence so great 
over a person mentally weak that he was entirely incapable of 



S30 



WILLS AND INHERITANCE 



exercising his own judgment. Contesting a will is an expen- 
sive process and a person should have very clear grounds be- 
fore attempting it 

A man's will, as expressed by the name, is his wiU as to 
the disposition of his property, and rarely pleases anyone 
except those who are immediately benefited. Owing to the 
publicity given to famous cases where wills are contested, there 
is an erroneous popular impression that any clever lawyer can 
break a will. It is very difficult to break a will ; of all the wills 
probated each year but a smaU percentage are contested and 
few are ever set aside. 

It is a current belief which derives color from the sensa- 
tional contests of which we read in the newspapers, that a 
great many wills are broken. But, though the attkcks of 
disappointed or greedy relatives are numerous, the contrary 
is true according to the records of the largest county of the 
state with which I am most familiar (Massachusetts), and 
where predatory tendencies against testators are well de- 
veloped. These records show a steady average of rather 
less than one per cent of wills disallowed during the last 
ten years, a result which is made more remarkable by the 
reminder that some of these were set aside because of de- 
fective attestation instead of the mental incapacity and undue 
influence of the maker ordinarily urged by the rapacious. 
The statistics for the same period show a yearly average of 
less than one per cent of wills compromised— that is, where 
the legatees and next of kin agreed to split their differences 
with the sanction of the court. These figures, which are un- 
doubtedly indicative of conditions elsewhere, reveal a dis- 
position on the part of juries to uphold the validity of legal 
testaments and tend to contradict the notion of the man in 
the street that his last wishes are apt to be disregarded.* 
Note: 

I. To contest a will is rarely wise. (See § 31 on 
litigation.) 



» "Uw and The Family." Robert Grant, Judge of tlie Probate Court. Botton. 



RIGHTS IN PROPERTY LEFT BY WILL 



Review Questions 



531 



I. When real property has been devised, who has to pay the in- 
heritance tax? Explain the working of an inheritance tax. 

J. What are the general provisions of the law of your state as to 
inheritance taxes? 

3. Whose duty is it to transfer corporate stock left by a will? 

4. Who are entitled to notice of the contesting of a will? 

5. What mental unsoundness invalidates a will? 

6. What is meant by undue influence? 

7. Is it usually wise to contest a will? Give reasons for your 

answer. 



PART XII 
PERSONAL RELATIONS 



■si:,- ";-.-.-!:; Mil iiiliiiiijJttiit, 



CHAPTER LXXIII 



HUSBAND AND WIFE 



§471. Persons Who May Marry 

Before marrying, one should always consult the law of 
the state where the ceremony is to be performed. Almost all 
states require a marriage license. 

Age Requirements. All states require the consent of 
parents or guardians if the parties are under a certain age. 
This age varies in different states, the average age ranging 
from twelve to eighteen years for a woman, and from four- 
teen to twenty-one years for a man. 

Forbidden Marriages. Some states forbid the marriage of 
first cousins. Many states forbid intermarriage between races, 
and in some of the southern states marriage between a white 
person and a negro is a crime. Persons married to those of 
other races or to very near relatives should consult the laws of 
a state before taking up residence in it, as, even if such mar- 
riages are valid in the states where they were performed, in 
other states which forbid such marriages it might be a crime 
for the parties to live together. 

Annulment of Marriage. If a person who is under the 
age of consent, as fixed by the law of the state where the 
marriage takes place, marries without his or her parents' or 
guardians' consent, the parents or the guardians can usually 
have the marriage annulled ; but not if, after coming of age, 
the person has of his or her own free will lived with the other 
party to the marriage. 

Invalid Marriages. Anyone who has a husband or a wife 
living and is not divorced cannot, of course, marry again. If 

535 



536 



PERSONAL RELATIONS 



he or she attempts to do so, the marriage is of no eflFect; but 
as a rule the other party to the first marriage may apply to 
the court to have the second marriage declared of no effect 
and to establish the fact that the children of the first marriage 
are the legitimate children of the innocent party. This is a 
wisecourse. as it insures the property rights of the children. 
The mjured person may also cause the other party to be 
prosecuted criminally and sent to prison for bigamy. In this 
case the prosecution must be brought in the state where the 
bigamous marriage took place. 

If a person marries again with the honest belief that a 
long missing husband or wife is dead, there would be no 
grounds for prosecution, but the other party to the second 
marriage may apply to have the marriage set aside and any 
children declared to be his or her's only. The person who 
marries beheving in the death of a husband or wife may apply 
to have the second marriage set aside; also the missing hus- 
band or vvife may. unlike Enoch Arden. apply for annulment, 
in such a case the children would go to the party who had 
had no previous marital entanglement. If no action is brought 
such a marriage remains valid and binding, but the supposedly 
dead husband or wife would probably have to apply to the 
court m order to obtain die right to marry again. 

The length of time for which the absent person must 
have been missing in order to permit the husband or the wife 
to marry again without committing bigamy differs in the 
various states. In such a case the statute law of the state 
where the new marriage is to be performed should always be 
ronsulted. The length of time prescribed by law varies from 
live to seven years. 

Marriage Against One's Will. A person cannot be mar- 
ned against his will; if forced into a marriage or induced to 
marry through fraud, or if he marries while too intoxicated 
to understand the nature of his act, he may apply to the court 



;i 



1^1 



HUSBAND AND WIFE 



537 



to have the marriage declared void. The relatives or friends 
of an idiot or an insane person who attempts to contract mar- 
riage may have the attempted marriage declared of no effect. 
If a person marries while sane and afterwards becomes insane, 
that is a different matter ; the marriage holds good. 

If a person discovers after marriage that the other party 
is physically incompetent to enter into the marriage relation 
and that this physical condition is incurable, he or she is en- 
titled to have the marriage set aside. Except where there 
has been specific legislation on the subject, contagious diseases, 
such as tuberculosis, venereal diseases, etc., do not prevent a 
person from entering into a binding marriage. 

In any case a party who is entitled to have the marriage 
annulled must act promptly. If there is any unnecessary de- 
lay, or if the party willingly Hves with the other party after 
discovering the circumstances which would entitle him or her 
to be released from the relation, the courts will refuse to 
interfere. Even when persons are entitled to be freed, it is 
against public policy to break up marriage where there is any 
disposition of the parties to continue living together. 

Note: 

I. Wherever there is a marriage license bureau, all the 
information necessary as to the law may be ob- 
tained at that bureau. If there is none, one should 
consult the domestic or personal relations law of 
the state or a reputable lawyer. 



§ 472. What Constitutes a Marriage 

The usual marriage ceremony in this country is a religious 
one, and inasmuch as clergymen can lawfully perform mar- 
riages, this is all that is necessary. A clergyman is not author- 
ized to perform marriages until he has been duly licensed to 
preach. There must be some witnesses present, usually two. 



538 



PERSONAL RELATIONS 



But in other countries a civil ceremony is necessary, since 
the religious ceremony is not binding. Certain officers in this 
country, such as mayors, city clerks, and justices of the peace 
are authorized by law to perform marriages. 

Persons may also marry in some states by simply signing 
a written contract in the presence of other persons who sign 
with them as witnesses. All who sign must acknowledge their 
signatures before a judge or some other authorized person 
and the contract must be recorded in the office of registry 

Formerly it constituted a valid marriage in most parts of 
this country if two people who were living togedier simply 
introduced or spoke of each other to third parties as husband 
or wife. But this so-called "common law marriage" has been 
abohshed by law in many states, and it is never a safe form 
of mamage. Where a common law marriage is entered into 
and is valid, divorce can be obtained only in the usual way 
Marriages according to the customs of the Society of Friends 
and the Ethical Culture Society are recognized as valid in 
most states. 



Notes: 

1. In most states a marriage license is necessary and no 

clergyman or official will marry a couple until they 
produce the formal license. 

2. A marriage certificate signed by the clergyman and 

by the witnesses should be given the bride to keep 
as proof of the marriage. 

3. Any person intending to marry should make sure 

that the party performing the ceremony is duly 
authorized. 

4. The design of the solemnization of marriage is that 

due publicity should be attained. A secret mar- 
riage is an attempt to evade this salutary rule 
and is rarely justifiable. 



HUSBAND AND WIFE 



539 



§ 473. Personal Rights of Husband and Wife 

A wife has a right to claim support from her husband. 
She may compel him to support her by bringing an action in 
the proper court, or she may order such things as she needs 
and have them charged to him. The things so ordered must, 
however, be articles of food, clothing, medicine, or other 
things necessary to health, life, or comfort. It has been de- 
cided that theater tickets and bonbons are not necessaries of 
life. A wife has a right to order things of a quality suited to 
her husband's income. If he is wealthy or in comfortable cir- 
cumstances, servants* wages and taxi hire may be considered 
necessary for her proper support. 

A husband has a right to require his wife to perform such 
services as are necessary to conduct his household in accord- 
ance with the style of living to which his income entitles him. 
A wealthy man has a right to ask his wife to supervise and 
oversee his servants, to manage his household accounts, etc., 
and a poor man may rightfully ask his wife to perform 
necessary domestic work such as cooking, cleaning, etc. This 
is in return for the duty of support which he owes her. 

Both husband and wife have a right to each other's society. 
If cither one leaves the other it is good grounds for the de- 
serted party to obtain a legal separation, or in some states 
a divorce, unless it was because the husband's or the wife's 
cruelty, habitual drunkenness, or moral turpitude had made it 
unsafe to live with him or her. ( See § 476. ) 

Neither husband nor wife can sue the other for damages 
for injuries, but either may be bound to keep the peace if he 
or she abuses the other, or the injured party can secure a 
legal separation. 

Notes: 

I. The right to buy necessaries on the husband's ac- 
count is restricted by his credit and the mer- 



540 PERSONAL RELATIONS 

chant's willingness to take rhances on collecting 
the amount 

2. A merchant charging a wife's necessaries to a hus- 
band's account should make sure she is not ob- 
taining enough elsewhere. If so, he may not be 
able to collect. 

§ 474. Rights of Husband and Wife in Each Other's Property 

The question of dower and curtesy has been taken up 
more fully in the chapter on wills (§ 466) and real property 
(§409). Where dower exists it cannot be taken from the 
wife unless she signs a deed of the property or a written 
release of her right of dower. 

In New York the wife can cut off the right of curtesy of 
her husband by making a will which leaves the property to 
other persons. 

Formerly, a husband had a right to the use of his wife's 
real property during her life. This was called an estate by 
marital right. Probably in none of the states of the Union 
does this right exist today. In former times all a wife's per- 
sonal property at once became her husband's when they mar- 
ned, and all he had to do in order to claim the personal 
property was to take possession. This right, too, has been 
greatly modified and in most states entirely abolished. 

Community Property. In some states that have their mar- 
riage laws from the Roman law rather than the common law 
die system of community property prevails to a certain extent' 
The marriage relationship is regarded in some respects as a 
partnership. All property with certain exceptions acquired 
by either husband or wife or both during the marriage is 
regarded as the community property of both ; but in most of 
these states, while the marriage law continues, the husband 
has control of it. Upon the death of either the entire com- 
munity property goes to the other if there are no children 



HUSBAND AND WIFE 



541 



The property excepted from the community rule and left 
under the separate ownership and control of one or the other 
is known as the separate property of husband and wife. It 
includes all property owned by either at the time of marriage 
and all acquired afterwards by gift, devise, or descent, or 
property taken in exchange for property of the kinds enumer- 
ated. Generally, the income from separate property is re- 
garded as separate property. The states and territories which 
use this system are: 



Arizona 
California 
Louisiana 
Nevada 
New Mexico 



Philippines 
Porto Rico 
Texas 
Washington 



Note: 



I. A married woman may, as a rule, prevent her hus- 
band from getting control of any of her property 
either before or after her death. In some states 
she still must obtain his consent in order to sell 
her property. In most states today a husband can- 
not cut off his wife's right to dower without her 
consent. 

§475. Rights of Husband or Wife in Case the Other is 
Injured 

A husband has a right to recover damages for his wife's 
injuries because of his legal right to her services. The injury 
deprives him of these services and he is awarded damages as 
a compensation for his loss. He may recover, in addition, for 
the expense of medical attendance since he is liable for it. 

A wife has a right to recover damages only in case of her 
husband's death, and then only if the statute law of the state 
gives her a right of action. The Employers' Liability and 



542 



PERSONAL RELATIONS 



Workmen's Compensation Acts usually give this rieht of 
action. (See Chapter XLII.) 

In some states either husband or wife has a right to re- 
cover for the death of the other under the acts giving the 
right; in others, only the wife has a right to such compen- 
saboa The wife has in no case a right to recover for her 
husband s mjuries. That right is his. A wife has a right to 
recover for her own injuries, pain, suffering, loss of time, and 
permanent mjury, in addition to her husband's right to dam- 
ages for loss of her services. In all cases the law of the state 
must be consulted in order to know exactly what those riehts 
are. * 

§ 476. Divorce 

There are two forms of divorce: one is the limited divorce 
which most people, when they distinguish between the two 
forms, call a separation; the other form is the absolute 
divorce. 

A legal separation merely gives to the parties the right to 
hve apart and to the wife a right to claim a definite sum as 
support from her husband while living apart The limited 
divorce does not give any right to marry again. If they wish 
tte parties may annul the separation at any time by simply 
living together again. ' VJ 

An absolute divorce completely separates the husband and 
the wife as though they had never been married. After an 
absolute divorce cither party is entirely free to marry. If the 
parties become reconciled after a divorce and wish to be mar- 
ried again, it is necessary for them to solemnize a new mar- 
nage. 

The difficulty about divorce lies in the fact that there is no 
uniform law on the subject. Circumstances which one state 
considers ground for absolute divorce are in another merely 
ground for a legal separation. In New York the only ground 



HUSBAND AND WIFE 



543 



for absolute divorce is unfaithfulness to the marriage vow. 
In some of the western states what is known as incompatibility 
of temperament, or inability to get along happily together, is 
considered ground for an absolute divorce. Between these 
two extremes, there are states which recognize cruelty, habitual 
drunkenness, or abandonment as a ground for such a divorce. 
In almost all the states, including New York, a sentence to 
state's prison for life severs the marriage relation and even 
gives the other party a right to marry again without a formal 
divorce. All of these things, except incompatibility of tem- 
perament, are grounds for a kgal separation in states where 
they are not recognized as grounds for absolute divorce. 

The popularly condemned method of taking up a tempor- 
ary residence in a state which grants a divorce on easy grounds 
and obtaining a divorce without the defendant's appearing in 
the case at all, eitiier in person or by lawyer, is, besides being 
revolting to the moral sense of the community, an extremely 
unsafe method. Unless the summons is personally served on 
the defendant within the state where the action takes place, 
or the defendant voluntarily appears in court or is represented 
by a lawyer, the decree is not good outside the state where it 
is granted. Many states also do not recognize such a divorce 
if the party takes up a temporary residence in the state merely 
for the purpose of getting a divorce. 

If a woman marries again after obtaining such a divorce 
she may find herself without any of the rights of a wife if 
she and her new husband afterwards move to a state other 
than the one where the divorce was granted ; and, if anyone 
chooses to make an objection, the children of the second mar- 
riage may be prevented from inheriting property belonging to 

their father. 

Where the wife sues her husband for an absolute divorce, 
she has a right to ask the court to compel him to pay her 
lawver's fees and, if the divorce is granted, to pay her a 



J^T^ 



PERSONAL RELATIONS 



reasonable amount for her support during the rest of her life 
At the husband's death the wife is entitled to her dower right 
in all the real estate which he owned while they were married 
and before the divorce; but if the wife dies first, her husband's 
right of curtesy is lost by the divorce. 

The dower right of a wife who is divorced by her husband 
IS cut off by the decree of divorce. 

In a suit for a divorce neither the husband nor the wife 
who ,s suing nor the other party may be required to testify to 
anythmg which would prove the right of either to a divorce 
Hut either one may be required to testify to anything which 
would prevent the divorce, and either one may be called upon 
to testify to their marriage. 

If a wife is unable to support herself during the trial in 
most states she may apply to the court for temporary alimony, 
that IS. an allowance from her husband sufficient for her sun- 
port during the trial. Alimony must be asked for during the 
tnal of the divorce action and must be included in the decree 
of the divorce. After a decree of divorce has been entered 
It IS too late to ask for alimony. 

If a husband or a wife who is suing the other for divorce 
on the ground of unfaithfulness to the marriage vows, is him- 
self (or herself) proved guilty of unfaithfulness, no divorce 
will be granted, but the parties will be left to the situation they 
nave themselves created. 

A divorce which was obtained by an agreement between 
Ae husband and the wife would be of no value whatever 
Marnage to another after such a divorce would be no mar- 
riage at all. 



I. 



Review Questions 

Who may marry in your state? What are the requirements for 
a vahd ceremony? 4""cnicnis lor 



HUSBAND AND WIFE 



545 



2. Where can information as to the laws relating to marriage be 

obtained ? 

3. Who is authorized to perform the marriage ceremony in your 

state ? 

4. What rights of support has a wife? What rights of assistance 

has a husband? 

5. What are the grounds for divorce in the state in which you live? 

6. What rights in his wife's property has a husband in your state? 

In your state can a wife sell her separate property without her 
husband's joining in the deed? 

7. What are the features of the law as to property of married 

people in those states that have followed the Roman law? 

8. In your state what rights of recovery has a husband when his 
wife is injured? Has she any right to recover for her husband's 

injury? What rights has the survivor in case of death? 

9. Should there be an amendment to the Federal Constitution giving 

Congress the power to adopt uniform divorce laws ? 



PARENT AND CHILD 



547 



CHAPTER LXXIV 

PARENT AND CHILD 

§ 477. Duties and Rights of Father in Relation to Child 

A father must support his child. He may be compelled 
to do so by the court if necessary, or anyone interested in 
the child has the same right to charge its father with things 
necessary for its support that a wife has. The things charged 
to the father must be food, clothing, lodging, medical attend- 
ance, or other things necessary to its health ; and the child's 
protector also has a right to charge the expense of an educa- 
tion compatible with the social standing and wealth of the 
child's family. The food, clothing, etc., may be of a quality 
no higher than is suited to its father's means. 

In return for this duty the law gives the father the right 
to the child's services and wages until he becomes of age. 
It is the duty of the child to obey its father and he has a 
right to compel this obedience by punishment, provided such 
discipline is not exercised in a cruel and vindictive manner. 
A child cannot be put to work until he has reached a certain 
age (generally 12 or 14), by the school law, but any money 
he earns in his spare time is legally his father's if the latter 
chooses to claim it. A father may voluntarily give a child a 
right to his own services and wages. This is called emancipa- 
tion, and is usually effected by acquiescing in the child's draw- 
ing his own wages. Should a daughter marry before coming 
of age, she is emancipated thereby. 

Where Third Persons Are Concerned, If a third person 
injures a child in any way, the father has a right to sue for 
damages for the loss of the child's services. Where a daughter 

546 



has been wronged a father may use this form of action to 
punish the man who wronged her. The loss of services may 
be purely a fiction, but in such a case a father has a right to 
this action, even though his daughter performed only nominal 
services about the house. 

He might also prosecute the man crirr.inally if the daughter 
was under the age of consent fixed by law. This is 
under twenty-one, but varies from twelve to eighteen in 
the different states. The father would still have the right 
to recover damages although the daughter was over the age 
of consent, if she was under twenty-one, or if she was over 
that age and living at home with him. 

A father is not liable to third persons for injuries caused 
them by his child unless the injury was the result of the 
child's carelessness in performing some service for the father. 
As a practical matter, the father usually pays the bills rather 
than have the child sent to jail or put on probation. 

Notes: 

1. If you employ a boy or a girl under age, you should 

have the father's written consent to pay its wages 
to the child. 

2. Where a neighbor's boy breaks a window, preserve 

your temper and settle without a quarrel. 

§ 478. Duties and Rights of Mother in Relation to Child 

If the father is living, the mother as a general rule has 
practically no rights or duties towards her child which the 
law will recognize. She is not called on for its support and 
she is not entitled to its earnings. She is not liable for any 
injuries which the child may cause to other persons. 

Where the father is dead the mother is not obliged to 
support the child ; instead it may become an object of charity. 
Where the mother does choose to support the child, in some 



548 



PERSONAL RELATIONS 



PARENT AND CHILD 



549 



U 



cases she may De allowed to claim its earnings; in others she 
has no claim. 

Where a daughter has been wronged, sometimes the courts 
will give the mother a right to recover damages from the 
man who wronged her. Where the mother has no legal right 
to her services, the decision depends on the point of view 
which the court adopts. 

^ In some states a man may will the guardianship of his 
children away from his wife at his death ; in others the mother 
is recognized as a joint guardian of the children and given 
the first right to them. In case of a divorce, the courts give 
the children to the party whose custody they think will be for 
the best interests of the children. 

Nate: 

I. Courts rightly hold that generally the mother should 
have the custody of the child. 

§ 479. What Duties and Rights May Be Claimed by Adopted 
Children 

To adopt children legally it is necessary to file papers of 
adoption with some court, the procedure being regulated by 
the statutes of the state. Unless these papers are filed, the 
children have no rights in the property of the foster parents 
and no legal right to use the parents' name. If the children 
have been legally adopted, they stand in the place of real 
children so far as the parents are concerned. 

A child who has been legally adopted has a right to the 
same share in the estate of a parent who dies without leaving 
a will which an own child would have received. (See Chapter 
LXIII on wills.) In some states adopted children have the 
same right by law in property coming from other people to 
their adopted father or mother, if these are dead, which own 
children would have had ; in others they have no right to such 
property. 



An adopted child, in order to find out whether it is entitled 
to property left by its adopted parents would have to consult 
the law of the state where it was adopted to discover the legal 
effect of the adoption. In order to find out whether or not an 
adopted child is entitled to take property left by any rela- 
tive of its adopted parents, it is necessary to consult the law 
of the state where the property is located, if it is real estate ; 
of the state of which the deceased person died a resident, if 
the property consists of personalty. 

§480. Children as Criminals 

A child must be old enough to understand the nature of 
its act before it can be treated as a criminal. The jury will 
determine, from seeing the child in court and from the testi- 
mony, whether or not it can be held responsible. 

Formerly, children committing crimes were treated in 
much the same way that other criminals were. Then came 
the reform school and the children's courts, and today we 
have the probation system in many states. In this direction 
there is, in most states, room for much improvement. No 
child should be allowed to grow up a criminal. 

A parent whose child is incorrigible may appear against 
it in court and have it put in a reform school or on probation. 

A child should be trained from its very earliest years so 
that criminal acts and incorrigibility are impossible. No mat- 
ter how kindly or wisely administered a public system of 
dealing with incorrigible children may be, the experience will 
leave a shadow on the child's after-life which the parent by 
wise and careful handling might and should have been able 
to avoid. 

Note: 

I. A criminal or vicious child should be a greater 
disgrace to its parents than to itself. 



550 



PERSONAL RELATIONS 



I. 

2. 
3. 

5. 



Review Questions 

What is the legal duty of a father to a child? What rights has 

he over his child? 
What right of suit has a father for injury to his child? Is he 

liable for the torts or wrongful acts of his child ? 
What duties and what rights has a mother concerning her children 

when the father is alive? When he is dead? 
In your state what rights has an adopted child? 
When can a child commit a crime? Who decides as to a child's 

criminality? 



CHAPTER LXXV 



GUARDIAN AND WARD 



§481. Personal Guardian 

If a child's father is dead, it may be necessary to appoint 
a personal guardian. A personal guardian or a guardian of 
property would be appointed by that court that has charge of 
probate matters, known as a probate court, a surrogate's court, 
or an orphan's court. If the mother is living, or any other 
near relatives, she or one of them would have the first right 
to the child's guardianship, if a proper person and able to 
take care of the child. If there is no dispute about the child's 
custody, it is not even necessary to go through the formality 
of being appointed unless there is property belonging to the 
child to be taken care of. If the mother or the next nearest 
relative is an improper person, it is safer to go through the 
formality of legal appointment. A child old enough to under- 
stand things (usually the age is fixed by law at twelve or 
fourteen) is generally allowed by the court to choose its own 
guardian. At common law, a child's father could always 
appoint a guardian for the child in his will or by a deed. In 
states where the equal guardianship law is in force, the mother 
becomes the child's guardian on the father's death. The father 
may appoint a guardian in any case where the mother is dead, 
and if the father is dead, the mother has the same privilege. 

The personal guardian has a right to the custody of the 
child, and it is his duty to support it and to provide for its 
education. The guardian may take the child's wages if the 
child is over school age, otherwise he may take what it may 
earn in its spare time. He has a right to the child's obedience 

551 



ID 



552 



PERSONAL RELATIONS 



GUARDIAJl AND WARD 



ssi 



and services about the house, and has the same right to dis- 
cipline the child that the father had. 

It was formerly the custom to apprentice children out 
to people to learn a trade. The professions were learned in 
the same way. The master generally supplied the child with 
food and clothing, and in return was entitled to all the child's 
services until he became of age. The master had practically 
the rights and the duties of a personal guardian in respect 
to the child, except that he was required to teach it his own 
trade or profession. A master generally had the right to 
administer corporal punishment when he deemed it necessary. 

Note: 

I. It is not necessary to appoint a personal guardian 
for a child unless there are no near relatives to 
act in that capacity, or unless the child would 
otherwise fall into the hands of a person who is 
morally or otherwise unfit to bring it up. 

§ 48a. Guardian of Property 

Where property belongs to a child, it is usually necessary 
to appoint a guardian of the property. The father, if he is 
living, is entitled to the appointment. If not, any near rela- 
tive may apply and, if the court considers him fit, it will 
appobt him. Otherwise the court will appoint whom it con- 
siders fit. The child if old enough (usually about twelve or 
fourteen), may choose his own guardian, and if the court ap- 
proves the choice it will appoint that person. 

If the property is left to the child by will, the person 
making the will may appoint a guardian to take care of the 
child's property. 

A bond is always required from a guardian of property. 
He must manage the child's property carefully and keep it in 
good repair. If there is any surplus income over what is 
needed for the child's support and education, or if the income 



IS to be accumulated, the guardian must invest the amount 
in such securities as are allowed by law for such investments. 
These are strictly limited to those known as gilt-edge securi- 
ties, and if the guardian invests in any others he will be per- 
sonally liable for any loss, while still obliged to turn over to 
the child any gain that he makes in so doing. He may, how- 
ever, without the danger of such liability, invest property left 
by will in any securities expressly permitted by the will. 

If it becomes necessary at any time to sell any of the 
property in order to protect the child's interests, the guardian 
should apply to the court for permission to do so. If at any 
time the income from the estate ceases to be large enough 
to support and educate the child, the court's permission must 
be obtained before spending any of the principal. 

A guardian may always apply to the court to have any 
doubtful provision of a will or a deed interpreted to him. 
In any doubtful case it is safer to do this and to get the 
court's permission to do anything necessary. 

Note: 

I, A trust company is the safest guardian for property 
belonging to a child. 



I. 



2. 



Review Questions 

When should a personal guardian be appointed? Who in your 

state would appoint such a guardian? What rights and duties 

has a personal guardian? 
What are the functions of a guardian of property? How may 

such a guardian be appointed ? Why would a bond be required ? 
Why is a trust company a better guardian of property than an 

individual ? 



IK' 



PART XIII 



SURETYSHIP 



II 



CHAPTER LXXVI 

THE CONTRACT OF SURETYSHIP OR OF 

GUARANTY 



§ 483. Definition 

The contract of suretyship is a contract to be responsible 
for the debt, default, or miscarriage of another. There are 
two kinds of such agreements: 

1. One is an agreement to be responsible personally if 
the debtor fails to pay; it may be enforced just as soon as 
the debt falls due and is not paid. This is the contract of 
suretyship proper. 

2. The other is a guaranty that the other party will pay 
his obligations, and is called a contract of guaranty. In this 
case, the person with whom the agreement is made must sue 
the debtor before he can collect from the guarantor. 

There are three sorts or forms of guaranty: (i) general 
or special, (2) limited or continuing, and (3) absolute or 

conditional. 

The party assuming the responsibility is called the "surety" 

or "guarantor." 

The party who is primarily liable is called the "principal 

debtor" or "obligor." 

The party with whom the agreement is made is called 
the "creditor" or "obligee." 

The party who indorses negotiable paper is not called a 
surety, though his responsibility is similar. An indorser*s 
responsibility is governed by very different rules from those 
relating to sureties. (See § 179.) 

557 



^•J*' 



SURETYSHIP 



§ 484. Nature of Contract 

The contract of suretyship is generally part of the original 
contract between the parties, and usually consists of signing 
some paper such as a bond or note as surety along with the 
maker of the original obligation. If a man signs an executor's 
bond along with the executor, he becomes a surety for the 
faithful performance of the executor's duties. 

The contract of guaranty is a separate agreement in the 
nature of an offer to be responsible for the extension of credit, 
or a separate contract written on the back of some other 
agreement If you write to Paul Jones asking him to extend 
credit to John Doe, and stating that you will see him paid, or 
if you write "I guarantee the within contract" on the outside 
of a contract and sign your name, you become a guarantor. 
Many men have come to grief through their careless will- 
ingness to become responsible for others. Long ago Solomon 
said: "A man void of understanding striketh hands and be- 
cometh surety in the presence of his friend." It is wrong 
for any man to become responsible for the financial mishaps 
of another unless he can afford to lose the money. When 
men who cannot afford to lose the money sign as sureties, 
they take chances they have no right to take. There is always 
a risk involved or the surety would not be demanded. 
Notes: 

1. Do not take any risk as surety for another which 

you cannot afford to pay if required. 

2. Do not ask a friend to be your surety unless the 

friend can afford to lose the money. 

1 485- Written Contnct 

The contract of suretyship or guaranty must always be 
in writing in order to be enforced. It is one of the classes 
of contracts specified in the Statute of Frauds, i.e., a promise 



SURETYSHIP OR GUARANTY CONTRACT 



559 



to answer for the debt, default, or miscarriage of another. 

(See §48.) . , 

If a person agrees to pay outright for somethmg to be 

done for another, or goods to be delivered to another, this is 
not a contract of suretyship and need not be written. For 
instance, if John Brown says to a grocer, "Deliver groceries to 
James Smith and I will pay for them," this is not a contract 
of suretyship or guaranty, but an outright agreement to pay 
on the part of John Brown— and the charge should be against 
Brown and not against Smith. But if Brown should write to 
the grocer, "If you will sell groceries on credit to Smith, I 
will pay for them if he does not," this is a contract of guaranty 
and must be in writing. Brown is promising to pay only in 
event that Smith does not. 

Notes: 

1. If you sell goods on credit, know exactly to whom 

tiie goods are to be charged. 

2. If you sell with a guaranty, be sure the conditions 

are stated in writing and signed by the guarantor. 



§ 486. Parties 

There are three parties to a contract of suretyship— the 
creditor or obligee; principal debtor or obligor; and the surety 

or guarantor. 

The surety must be competent to contract. He is the one 
who incurs responsibility under the contract of surety ; hence, 
it is esserftial that he be competent to bind himself. (The 
reason for taking a surety may have been because the principal 
was not competent to contract.) The promise to be respon- 
sible for the debt of the obligor must be made direct to the 
obligee or the surety will not be a party to the contract. Sign- 
ing a note or paper as surety is, however, a sufficient promise 
to the obligee. (See §§ i73» i74-) 



S6o 



SURETYSHIP 



It 



il 



907* Congidenitioii 

The contract of the obligee with the principal debtor or 
obligor is the consideration for the surety's promise. If it is 
a contract of guaranty, the consideration is the giving of 
credit to the principal debtor. If a bond or note, it is the 
furnishing of the money for which the bond or note was given. 
In the case of a bond for the faithful performance of the 
duties of an officer, the enjoyment of the office is the con- 
sideration or in the case of a bail bond the freedom of the 
prisoner is the consideration for the agreement of the surety. 

If the credit has been given to the principal debtor before 
the contract with the surety or guarantor, there is no con- 
sideration for this second contract and the surety is not bound. 
In such a situation, to make a valid contract and hold the 
surety the creditor or obligee must pay the surety something, 
remit something to the obligor, or extend the time of payment,' 
so that there may be a good consideration for the agreement 
of the surety. (See § 44.) 

Notes: 

1. If you are selling on a guaranty, have a written con- 

tract showing that you grant the credit in con- 
sideration of the guaranty. 

2. If the surety comes in after the credit has been 

granted, there must be a new consideration. 

§488. Delivery and Acceptance 

A bond, note, or paper of similar nature, which is indorsed 
or guaranteed, must be delivered to the obligee and accepted 
by him before it becomes a contract and the surety becomes 
liable on it. Simply receiving the paper, however, without 
any comment, is a sufficient acceptance. 

In a contract of guaranty, the creditor must notify the 
guarantor that he accepts his offer and will extend the credit 



SURETYSHIP OR GUARANTY CONTRACT $61 

asked for in reliance on his guaranty. Even where the creditor 
himself asks for the guaranty, he must still notify the guar- 
antor that credit has been extended. 

If the guaranty is for all sales during a certain period of 
time, such as a year, the creditor should notify the guarantor 
at once that he has granted the credit, and at the end of the 
period he should notify the guarantor again of the amount of 
credit he has granted during the year. 

Note: 

I. Before you deliver goods on a guaranty notify the 

guarantor that you take him as security. 



' Review Questions 

I What is the nature of the contract of suretyship? 

2. Distinguish between suretyship and the contract of guaranty. 

1 Isacontract of guaranty negotiable? Explain, 

4. How does the liability of a guarantor differ from that of an 

indorser of a promissory note? 

5. Why must all contracts of surety or guaranty be in writing? 
6* Distinguish between an original contract to pay for another 

and the contract of suretyship. 

7. Distinguish as to the liability of a guaranty for payment, that 

of one for collection and that of a continuing guaranty. 

8. Who are the parties to a contract of suretyship or guaranty? 
a How should a contract of suretyship or guaranty be adopted? 

10. An accountant agreed with a corporation through its president 

to examine the books. After beginning work he became un- 
easy and asked the president to guarantee payment personally. 
This the president did in writing. When the work was finished 
the corporation was insolvent. Was the president legally 

liable ? 

11. Is a surety liable for interest on claim after default? 

12. What is the distinction between guaranteeing payment and guar- 

anteeing collection? 

13. "I hereby guarantee the collection of the within note." Is the 

foregoing valid? 



:fl 



11 



RIGHTS OF SURETY OR GUARANTOR 



563 



i 
II 



I 



IP 



CHAPTER LXXVII 

RIGHTS OF SURETY OR GUARANTOR 
§ 489- Notice 

fixed amount due on a certain dav fU^ ^"'^^anieea is of 
liable, though not no^J^l ^'^^^JtZS ,^, 
creditor, or obligee, must enforce any securkv wE h ^ 
have and bring suit against the oblfgoTSre t T^ 

to the guarantor to collect what stZ:^ Jns L "" '"™ 

the nd^L^'Sffl"^^''"^ "^*™™"*^ "'* indorsement. 

te d^W ? "^ ^ '""■'*y '" *«' *^^e must always 

be demand of payment and notice that it h== t^ r . 

in order to hold him liable. ^™ '"'^^"'"^' 

I. A ^arantor must have prompt written notice if the 
obhgor falls down. 

§ 490. Defenses 

If the creditor cannot enforce thp rnnf,,^* 
debtor because of some defecrL t J ^^'"'^ *^ 

against the surety either ThKtaLL. ''""°' '"'°'" '' 

} uicr. 1 nis statement does not apply whert 

562 



the creditor cannot enforce the contract because the debtor 
was under age, or insane, or suffering under some disability 
which by law made him incapable of contracting. In such a 
case the very reason for having a surety was to protect the 
creditor from loss through such disability and the surety is 

not released. 

Fraud practiced upon the principal debtor or the surety 
would be a good defense to an action to enforce the contract 
against the surety. 

§ 491. Reimbursement 

After a surety has paid the debt, he is entitled to turn 
around and collect it. if he can. from the obligor, who had 
incurred the original obligation. Instead of paying the debt 
the surety may, if he chooses, apply to a court of equity to 
compel the obligor to pay it. and to have any security which the 
obligor may have given to secure the debt sold to pay it. 
He is then liable only if the obligor is absolutely unable to 
pay and any existing security does not sell for enough to 
satisfy the debt. 

§ 49a. Subrogation 

In addition to his right to recover from the original debtor 
anything he has paid on the contract, the surety has the right 
to be put in the creditor's place, so far as remedies against 
the debtor are concerned; that is, the surety is entitled to all 
the creditor's rights against him. including the right to enforce 
any security for the payment of the debt. This is styled the 
"right of subrogation." 

§ 493. Contribution 

A cosurety is one who is equally bound with another for 
the debt default, or miscarriage. Usually both sureties sign 
the same instrument at the same time, but this is not essential. 



564 



SURETYSHIP 




■ i 



I. 



wno ^ys the debt is entitled to recover from each of them a 

?Se ar:f':r °' "'r '^ •^^ ^'- '^^ -editor mtyi; 

oSi T/.. . "" *'*°"* ^«="""e *«^ c«"sent of all the 
^^J^'u"^' '°' '* *•" ''^^'^ *«= «^« effect as releask^ 
2^ . the security and wiU discharge the oblig^fon^ 
the rcmamder of the cosureties to that «tcnt 

§ 494- Extension of Time 

Merely extending the time to pay a debt without receiving 
cTLT '°"^'''"^*'«" f°' 't WiU not release the J^tyZ 

woSh rM!f ■ ''*'"' extension, based on a consideration 

would release a surety or guarantor. 

If a debt is guaranteed, a release or extension mav 
let the guarantor out. 

§ 495- Discharge 

The surety can be held to the contract nnl„ ,c t, j • 
If the cr«1if«r ,„A *u • . '^ *^°"^"" on'X as he made it. 

change Lk a/ ?' ^T'^^ '^'^°' ^^' ^ make any 
tTJr Ki ' t7 r'' ^'* *' '""'''y'' •^°"sent or he will cea^ 
to be liable. If the surety is not released hv HM, • ,? 

tion. the original contrac't st Js. If le ^^'^^^^ " ^f 7' 
prevent the delay, he must notify the ced^or to e^foTSl^ 
ment or must himself bring suit to do so ^^" 

If the creditor releases the principal debtor or any of the 
secunty given by him for the payment of the debt, hTfoses Ws 

debt and releases pfrt^f ^^TZ s^^^^^'^TZ^J: 
he will be entitled to collect from the surety on^ fhT ^' 
of the debt less what the land so releaLdTwortt ""'""* 



RIGHTS OF SURETY OR GUARANTOR 



565 



A surety must usually pay the debt in full before he can 
demand to be put in the creditor's place. 

If the creditor releases the obligor from payment, he re- 
leases the surety also. If, however, at the time he releases the 
debtor, the creditor states that he reserves his right against 
the surety, and so notifies the surety, the surety remains liable, 
but after the surety has paid the debt he may collect it himself 
from the principal. 

A surety on a bond for the faithful performance of the 
duties of some responsible position, will be released from 
liability if the employer continues employing the person hold- 
ing such position after discovering dishonesty in his dealings. 

In some states the guarantor or surety may give notice to 
the creditor to enforce his rights against the principal debtor 
when the contract falls due, and if the principal debtor, though 
fully able to meet the obligation at that time, afterwards be- 
comes unable to do so, the creditor cannot enforce the liability 
against the surety. 

Before any credit has been extended m reliance on his 
promise, a guarantor may give notice to the person from whom 
he has requested credit that he has changed his mind and 
refuses to be liable for the party for whom he asked the credit. 
He cannot thereafter be held responsible for any credit which 

may be extended. 

Death. If the obligor dies before he has entered upon the 
official duties for which a bond was given, or before he has 
received any money or taken advantage of any credit to which 
he was entitled under the agreement, there is of course nothing 
to hold the surety for. After the principal obligor has in- 
curred any liability under the agreement, the surety becomes 
liable and remains so even in case of the principal obligor's 

death. 

If the surety himself dies, his obligation is not discharged 
but his estate still remains liable on the contract. It must be 



'^ — 



566 



SURETYSHIP 



enforced against the other sureties first, however. After the 
death of a guarantor, no further credit may be extended in 
reliance on his guaranty, but his estate remains liable for 
what has already been given. 

Notes: 

I. The creditor on an obligation should enforce it 
within a reasonable time after it falls due, in order 
to be sure of his rights against the surety or 
sureties. 

Any changes in an agreement without the sureties' 
written consent may release them. 



2, 



V 



\ 'i 



'i 'I 



Review Questions 

1. What is the distinction between sureties and guarantors as to 

giving notice of default? 

2. If the principal debtor was a minor, would the surety be held > 
3- If a surety is compelled to pay, what redress has he? 

4. A creditor holds collateral and debt is guaranteed. Debtor de- 

faults and guarantor pays. What becomes of collateral? 

5. If the owner anticipates a portion of the payment due the con- 

tractor, IS the surety thereby released? 

6. A owes B $500 and offers his note for the amount for four 

months with surety as follows: "I agree to become responsible 
as surety for the payment of A's note for Five Hundred 
Dollars ($500) dated this day." Signed "C.» When the note 
becomes due, A pays $ioo on account and gives B a new 
note for $400 at four months. This is not paid, and B sues 
C on his surety contract. Can C make any defense, and if 
so, what? 



PART XIV 
DEBTS AND INTEREST 




CHAPTER LXXVIII 



DEBTS 



§ 496. Definitions 

Debt is the owing of money, goods or services to another. 
It is defined in the Century Dictionary as follows: "That 
which is due from one person to another, whether money, 
goods or services and whether payable at present or at a 
future time; that which one person is bound to pay or to 
perform for another ; what one is obliged to do or to suffer ; 
a due; a duty; an obligation." More particularly in law the 
word signifies the owing of money. The person owing is 
called the debtor and the other party is called the creditor. 

Generally, the creditor will make a demand for the debt 
when it is due, but legally it is the duty of the debtor to pay 
the creditor at his place of business on such date as the debt 
may be due. 

§497. Evidences of Debt 

If a debt is not paid when it is due, the creditor can sue 
for payment. In such case the primary question is, how is 
the creditor to prove his claim? The strongest proof would 
be a promissory note signed by the debtor of which the creditor 
was a holder in due course. An acknowledgment of indebted- 
ness would be equally good to prove the claim, but it might 
be subject to defenses or counterclaims. An account stated, 
or accounts as shown by books of original entry, such as a 
day-book or blotter, would be good evidence. If the obliga- 
tion is for goods delivered or shipped, receipts for the goods 
or bills of lading would be evidence that they had been sent 

569 



570 



DEBTS AND INTEREST 



i 



but not that they had not been paid for. So many people are 
careless in their business transactions, that many just and good 
claims cannot be coUected because the evidence to prove them 
in court is lacking. 

§ 498- Open and Stated Accounts 

An open or current account is the usual record kept by a 
merchant of sales of goods which had been made to the debtor 
from time to time. When suit is brought on an open account. 
It IS necessary to prove from the blotter or other book of 
original entry the fact of the sales at the times and in the 
quantities specified. A debtor has always the right to call 
for a bill of particulars stating wherewith he is charged. 

A stated or closed account is where an account has been 
rendered and the party against whom it has been rendered 
has agreed to it expressly or impliedly by receiving the bill 
and making no objections within a reasonable time. Against 
a stated account the Statute of Limitations would run from 
the time of the agreed-to statement. The Statute of Limita- 
hons on such accounts in the State of New York provides 
that action may not be brought after six years. 

Where an account is aU on one side of the ledger, the 
btatute of Limitations runs against each separate item. Where 
there has been a mutual account with entries on both sides 
It would run from date of the last balancing item It i<i 
necessary for this that the accounts really be mutual and 
not merely charges on one side and a red ink balance on the 
Other. 

§ 499- Receipts and Releases 

\Vhen payments are made, either partial or complete, the 
creditor should give the debtor a receipt showing the amount 
and the date when payment had been made. The debtor 
however, has no legal right to insist on a receipt. He can 



DEBTS 



S7I 



take a witness with him who will note the payment and be 
able to testify afterwards if the matter is disputed. (See 
§ 78, "Tender.") If he makes payment by check or by certi- 
fied check, the cancelled check would be evidence of the pay- 
ment. If the creditor will accept a check indorsed "Payment 
in full of all accounts," or "Payment in full of (a specified 
matter)" that would be a good receipt if payment is in full 
or if there is any dispute as to the amount owed. If such a 
check were only part payment of an undisputed claim the 
balance might still be collected. 

A release is usually a more formal instrument than receipt. 
Where matters have been in dispute or where claims conflict 
and the parties finally agree on a settlement, one or both 
parties will execute a general release. This is a very formal 
instrument; its phrases would include all matters that might 
by any possibility be in dispute between the parties, and it is 
signed under seal so that it becomes a sealed instrument and 
cannot thereafter be disputed. 

§500. Part Payment in Full Settlement 

It is a well-settled doctrine of law that part payment of 
a claim the amount of which is not in dispute cannot be a 
settlement of the whole claim. It happens many times that 
a man who cannot pay the full amount against him will pay 
one-half or more on the condition that he is to have a receipt 
in full. The law holds, however, that paying part of the 
amount that is due to be paid in full is not a consideration 
that will release him from the payment of the part he has 
left unpaid. If, instead of paying money, he pays property, 
the law would not inquire as to its value, and such a settle- 
ment would be final. Therefore a man who, pays part cash 
and part in some article of property would receive a release 
in full that could not be disputed later. It will also be settled 
by his taking a receipt in full under seal. If, however, a 



572 



DEBTS AND INTEREST 







claim is in dispute, a part payment of the claim may be 
accepted as a compromise and in such case will constitute full 
settlement of the whole claim. 

§ 501. Accord and Satisfaction 

An accord is an agreement between two persons one of 
whom has a claim against the other, that the debtor shall 
^vc or do something in consideration of which the creditor 
shall consider his claim satisfied. When such an agreement 
has been made and performed, it is caUed an "accord and 
satisfaction," and no further claim against the debtor may 
be brought by the creditor. 

If the parties to such an agreement accept a different thing 
from that which they are entitled to, they are nevertheless 
bound and a promise later made by the debtor to do something 
further in order to satisfy the claim is without consideration 
and therefore not enforceable. 

If the claim against the debtor has been an instrument 
tinder seal, an accord and satisfaction wiU only be valid if 
It IS likewise under seal. If, however, money is due and by 
statute the debtor has the right by bringing the sum due the 
creditor and such interest as may have accrued into court to 
be discharged, an oral accord and satisfaction is good. 

The agreement of accord and satisfaction may be either 
express or implied and as in aU contracts must have a con- 
sideration to be valid. It must also be understood at the time 
of the agreement that such things as are to be performed by 
the debtor shaU constitute an extinction of any claim that the 
creditor may have against him, and the creditor must also 
accept it with the intention of having such performance satisfy 
his claim. These latter requirements are absolutely essential 
and without them there can be no valid accord and satisfac- 
tion. 



DEBTS 



573 



§502. The Appropriation of Payment 

The question sometimes arises, when a debtor pays part 
on account consisting of items that became due at different 
dates, as to the items on which the payment is to be applied. 
If the debtor states when making his payment that it is to be 
applied to certain particular claims, he has the right to do this 
and the creditor cannot apply it to those older claims that 
are most likely to be outlawed by the Statute of Limitations. 
If the debtor, however, makes payment and says nothing about 
its appropriation, the creditor may use his discretion and apply 
it to the oldest items on the account. 

§ 503. Equitable Jurisdiction in Actions for an Accounting 

In the case of a partnership disagreement or where trustees 
are not giving satisfaction, the parties injured may go into 
a court of equity and ask that the other partner or partners, 
or trustee or trustees, shall be compelled to make an accounting. 
If a proper case is made out, the judge will order such an 
accounting to be made, usually sending it to a referee with 
direction to go into the account and render a report back 
to the court. If the court affirms the report of the referee, 
the accounting is conclusive as between the parties. 



I. 



2. 



Review Questions 

What is a debt? When, where, and to whom must payment 

of a debt be made? 
Is a ledger made from slips a book of original entry? Can 

cash loans be proved from check-book stubs ? Or by cash-book 

entries ? 
3. Distinguish the difference between an open and a stated account. 

To what extent is an account stated conclusive? Does the 

mere rendering of an account make it an account stated ? On 

what grounds may an account stated be opened? 
May one recover on an account stated on proof of the admission 

of a general balance without proving the items? 



4. 



574 



DEBTS AND INTEREST 



r 



la 



II. 



12. 



5- After how many years is a mutual account between merchants 
barred ? When does the Statute of Limitations begin to run > 

4 What constitutes a breach in the continuity of an account 
current? 

7, Within what time must one object after receiving an account to 
prevent its becoming an account stated? 

a When does the Statute of Limitations begin to run on an account 
stated ? 

9. What is a release? What is a mutual release? May a mutual 

release given on adjustment of old accounts be disturbed? 

Explain. May a release be disturbed? 
Is a debtor legally entitled to a receipt ? How may payment be 

proved? How may a check be used as evidence of payment? 
C accepts of K the note of X in full for K's debt to C, though 

the amount of the note does not cover the debt. Has C still 

a claim? 

Is an indorsement "in full of all accounts to date" on a check 
accepted by creditor (amount being insufficient) a discharge 
for a disputed claim? 
13. When a creditor accepts a part in satisfaction of the whole debt, 
how may the debtor guard against further demands ? 

A debtor sends a check to creditor stating that it is "in full," 
and the creditor cashes the check but declines to regard it as 
in fiiU. Debtor demands receipt in full or return of check. 
Creditor demands payment of balance. Is there an accord 
and satisfaction? 

Which has the first right to apply a payment against any one 
of several debts, the debtor or the creditor? What is the rule 
for the appropriation of payments made by a person who owes 
several interest-bearing debts to the same creditor? 
l4 When has equity jurisdiction in cases of account? Where one 
party is entitled to an accounting from another, what is the 
usual and proper legal proceeding to secure such an account ? 

17. Under what circumstances is taking a debtor's note payment of 
• a pre-existing debt? 

18. If the note is not Uken as absolute payment and is afterward 

dishonored, must creditor sue on it before returning to his 
original demand? 

19. Is the note of a third party, taken at time debt is created, pay- 

ment therefor? 



14. 



15. 



CHAPTER LXXIX 

ENFORCING PAYMENT OF DEBTS 

§ 504. When the Creditor Has Some Security for the Debt 

Security may be in the form of a mortgage on land or on 
personal property, or it may consist of a statutory lien, or of 
a right to reclaim property under a contract of conditional 

sale. (See § 95) . . . 

If the security is a real estate mortgage, and the debtor 

has neglected or definitely refused to make the payments 

agreed upon, the proper course is to foreclose. Should the 

mortgage provide that on default the holder may sell the 

property, a foreclosure proceeding is still necessary. In order 

to give a clear title, the suit to foreclose must be brought and 

all legal formalities complied with before the property is sold. 

It must be sold at public auction, unless the mortgage permits 

a private sale, the former being the wiser method to follow in 

all cases, as afterwards no questions concerning the legality of 

the sale will arise. 

When the mortgage is on real property consisting of 
several lots or parcels, they must be offered separately, unless 
the mortgage specifically permits that they be sold as a whole. 

Where there is a lien on property of any kind, such as a 
mechanics* or an employees' lien for personal services, the 
statutes which provide for the safeguarding of this class of 
claims also provide a method of collecting them. Common 
carriers have a lien for the freight upon goods carried ; ware- 
housemen upon the goods stored, for storage charges ; tailors 
have liens on the suits made up from cloth given them ; and 
carpenters upon the finished product of their labor, etc. The 

575 



576 



DEBTS AND INTEREST 



ENFORCING PAYMENT OF DEBTS 



577 



f' 
III I 



wh 



fSi'^ 



statutes bearing upon each case should be examined and the 
method of enforcement strictly followed, keeping in mind 
that the lien laws of each state vary in kind, number, and 
procedure. 

In the case of a conditional sale, properly registered, the 
ownership remains in the seller until the full purchase price 
has been paid, or, if the agreement of sale stipulates that title 
should pass on the payment of a smaller amount, until that 
has been paid. Where the purchaser fails to make the agreed 
payments, the seller has to reclaim the property. If it is not 
surrendered peaceably, he may have to resort to legal pro- 
ceedings to recover possession. ( See Form 22. ) 

Note: 

I. The matter of giving credit and avoiding loss is one 
of the most difficult business problems. All large 
houses have credit managers who by specializing 
become very skilful in judging men. 

§ 505. Where There Is No Security for the Debt 

If a debt is unsecured, it is necessary to bring suit and to 
get a judgment against the debtor before the court will grant 
an execution, i.e., an enforcement of the judgment. An execu- 
tion takes the form of an attachment and a sale by the sheriff 
of the debtor's property, advertised in the manner required 
by law. Household furniture and the tools used in following 
a trade are generally exempt from seizure. The articles thus 
exempted are more definitely enumerated by the statute cover- 
ing this matter and vary in each state. 

An execution generally holds good until the amount for 
which it was issued has been wholly satisfied. It can be en- 
forced only against property within the jurisdiction of the 
court granting it, and if the fact should appear that there is 
property belonging to the debtor in another jurisdiction, it is 



necessary to file a transcript of the judgment there and to 
take out another execution. It may be necessary to obtain 
a new judgment for property outside the state. In such case 
the suit would be on the judgment and not on the original debt. 

No proceedings for the collection of debts are satisfactory. 
If they are harsh, poor people are oppressed; if lenient, dis- 
honest people defraud those who trust them. 

In business circles good credit is becoming a matter of 
character and achievement, and a day may come when the 
man who does not pay his debts and the man who embezzles 
will find it equally impossible to do business. 

§ 506. Attempts to Defraud Creditor 

In the case of fraud, the law generally allows execution 
against the person of the debtor, i.e., arrest and imprison- 
ment. If there is reason to believe that the debtor intends 
to escape or to convey his property out of the jurisdiction of 
the court, the first step in the action to collect the debt should 
be an application for an order of arrest. The debtor must 
then give bond or go to prison. In bringing such proceedings, 
a reputable attorney should be consulted. 

If at any time during the suit the debtor attempts any 
fraudulent disposition of his property, he may be imprisoned, 
and if as a consequence of such fraud there is no property 
to sell, he may be kept in prison until he pays the debt. 

Where a debtor has conveyed or assigned property with 
intent to defraud any of his creditors, the defrauded creditor 
may apply to the court to set aside the transfer. Even a life 
insurance policy taken out for a larger amount than the cir- 
cumstances of the debtor warranted at the time, or for the 
express purpose of defrauding his creditors, or which has a 
cash surrender value to the debtor, may be used to satisfy 

claims. 

In many states the laws against fraudulent debt are not 



578 



DEBTS AND INTEREST 



i 




SO severe and are difficult to enforce. It is probable that more 
money « lost by fraudulent debts than by afl the forms of 
outnght theft combined. 

Note: 

I. Before trusting money or property to another, be 
sure that he is trustworthy. If in doubt, decide 
whether you can afford to lose the money. If you 
decide that you can, do not worry about it later. 

§ 507. The Modem Tbeoiy of Credit 

In business credit-giving is not a matter of favor but of 
busmess discretion. In the larger establishments the credit 
dqartment k presided over by experts who investigate those 
who seek credit and, after ascertaining what character, busi- 
ness ability, and available assets the applicants possess, de- 
termuie to what extent it is prudent to give diem credit. 
The result of this procedure is that in each line of business 
those who are unreliable, slack in business, extravagant in 
habits, and careless about obligations, find increased difficulty 
m obtammg credit and are ultimately forced out of business 
On the other hand, those who are honest, careful, and 
methodical in their business dealings get the credit to which 
they are entitled and their good name becomes more valuable. 
Any business man, whether he seeks credit or gives it, 
should inform himself through some of the modem works 
on credit and collections of the practice in regard to granting 
credits and making coUections. As a result of careful man- 
agement the losses from bad debts and business failures tend 
to become less, and by a survival of tiie fittest the modem 
business house in its practice becomes more careful, more 
economical in management, more practical in its conduct, and 
more ethical in its relations to its customers, its employees, 
and those from whom it buys. 



ENFORCING PAYMENT OF DEBTS 



579 



When a business house finds itself in difficulties, the credit 
men representing its creditors get together, and if on careful 
examination there is any reasonable chance of those in charge 
pulling through, the creditors usually extend credit and 
prescribe a course of conduct that will in most cases restore 
prosperity. If instead, they find hopeless mismanagement, 
extravagance, or dishonesty, they decide on what legal steps 
are to be taken to save as much as possible for all the creditors. 
This result is usually sought through bankruptcy proceedings. 
In consequence the subject of bankruptcy has much importance 
in modern business Ufe. 

Notes: 

1. In business a good character helps the debtor obtain 

credit. 

2. The creditor needs to be a good judg« of character 

to avoid bad debts. 

§ 508. Liens 

A lien is a legal claim or hold on property as security 
for a debt or charge. In general application, the term "lien" 
embraces all cases in which real or personal property is charged 
vr'th the payment of a debt. The most common forms of 

lien are I 

I Common Law Lien. This is the right to retain the 

possession of personal property until some debt secured by 

or due on such property shall be satisfied. 

2. Statutory Liens. Those liens which are provided for 
by statute in contradistinction to those created at common law. 
These liens cover cases not provided for by common law. 

3. Equitable Liens. A lien upon real or personal prop- 
erty whether or not in the actual possession of the lienor, in 
form which courts of equity alone recognize. 

4. General Lien. A lien upon property for a general 



s8o 



DEBTS AND INTEREST 



ENFORCING PAYMENT OF DEBTS 



S8l 



(I 



I 




^m 



balance due from the owner. Tliis is not favored and can 
only be established by contract, express or implied, or by 
custom of trade or of the parties. 

S- Judgment Lien. A lien following upon a judgment, 
governed entirely by statute, and usually dependent upon the 
iihng of the judgment 

6. Mechanics' Lien. A lien upon buildings for materials 
furnished or for labor. It can be secured by mechanics and 
material men. It is entirely statutory. 

7. Particular Lien. A lien upon specific propertv for 
laLor or money expended on that property alone. 

Originally, liens applied only to chattels, but now they may 
be enforced in equity upon both real and personal property, 
or upon money in the hands of third persons. Any property 
to be subject to a lien must be tangible. 

A lien may be waived or extinguished by the voluntary 
parting of possession by the lien-holder or by a sale of personal 
property other than in the manner prescribed by statute. A 
lien is discharged when payment of the debt or obligation 
which it secures is made.* 

§ 509. Attachment 

Attachment is a legal process by means of which money or 
property and goods of the debtor in the county can under 
certain circumstances be seized as the first step in a suit to 
collect. In Massachusetts, New York, Pennsylvania, Indiana, 
and Cahfornia, any suit can be commenced by attachment 
In most of the states, however, it is merely a provisional 
remedy, incident to an action commenced at or before the time 
when the attachment is sued out. In New York and most 
of the other states it is only allowed in cases where it is 
necessary to prevent sale, removal, or other special circum- 
stances. 



_> American and English Encyc. of Law. Vol. 14, page 173a. 



The New York Code provides that a warrant of attach- 
ment against the property of one or more defendants in an 
action may be granted upon the application of the plaintiff, 
where the action is to recover a sum of money only, as damages 

for: 

1. Breach of contract, express or implied other than a 

contract to marry. 

2. Wrongful conversion of personal property. 

3. An injury to person or to property, in consequence 

of negligence, fraud, or other wrongful act. 

To entitle the plaintiff to such a warrant he must show 
by affidavit, to the satisfaction of the judge granting the same, 
that there are special reasons why such a process should issue 
to save the plaintiff's rights. 

§ 510. Execution 

After trial, if judgment Is secured by the creditor, it is 
usually a verdict for an exact sum and costs of the action. 
To collect this, execution must be issued, which means that 
a court officer, a constable, sheriff, or marshal, is directed 
to levy on property of the debtor, not exempt from execution, 
and publicly to sell the same, and after paying the costs to turn 
the proceeds over to the creditor to the amount of his claim. 
If any surplus remained it would be paid to the debtor. 

§511. Garnishment 

"Garnishment is a proceeding in the nature of an attach- 
ment or execution by means of which credits, property or 
effects of a debtor in the hands of a third person may be 
subjected to the payment of the claims of the creditors of 
such debtor. The proceedings are generally spoken of as a 
mode of attachment or execution, but differ therefrom in two 
important particulars, to wit, in the case of garnishment no 



Ill 






DEBTS AND INTEREST 



ENFORCING PAYMENT OF DEBTS 



583 



11 



actual possession of the property in the hands of the garnishee 
(third party) is taken, and as a rule no specific lien acquired 
upon the property or credits in the hands of the garnishee." « 
So, for example, where a man owes another money and 
though he has a position and should be able to pay he does not. 
an order may be obtained from the court by his creditor' 
which will give the latter the right to collect a portion of 
that debt each week from the debtor's employer who, of course, 
subtracts it from the debtor's salary. This continues until the 
sum is paid in full. 

Garnishment may be collected for damages, resulting from 
a breach of contract if they have been reduced to a certainty. 

Garnishment is known in some of the states as the "trustee 
process," "factorizing process," and "attachment execution." 
It is strictly a legal remedy, although in a few states it par- 
takes of an equitable remedy. 

A person to be charged as a garnishee must have actual 
control and possession of the property of the debtor with 
which he is sought to be charged. 

A garnishee is liable only for the amount owing by the 
debtor to the creditor at the time of the commencement of 
the action. 



1. 



3. 



Review Questions 

How should property be sold under a mortgage? If several 

parcels of land are included, may they be sold together? 
How are laws enforced? In case of a conditional sale, where 

the buyer fails to pay as agreed, what can be done? 
How is an unsecured debt collected? How does an execution 

operate? What personal property is exempt from execution 

in your state? 
How long does an execution hold good ? What could be done 

if the debtor had property in another state? 



5. When the claim is based on the debtor's fraud, or the debtor 

tries to escape or to remove his property from the state, what 
summary proceeding may be taken? Can a man be im- 
prisoned for debt? 

6. If a debtor transfers his property to his wife, can the creditor 

touch it? 

7. Why is credit given in business? What is credit? How may 

business credit be secured? 

8. What motives influence credit men when a debtor's business is 

in difficulties? 

9. What is a lien? What is a common law lien, statutory lien, 

equitable lien, general lien, judgment lien, mechanics' lien? 
Is a mechanics' lien common law or statutory? How can a 
lien be waived? 

10. What is an attachment? What is its object? 

11. What is a judgment? Who levies an execution? What pro- 

cedure follows? 



'ao eye, 1058. 



INTEREST 



I 



58s 




CHAPTER LXXX 

INTEREST 

S 513. Interest 

Interest is compensation or hire for the use of money. 
It has been contended that the payment of interest is contrary 
to the principles of justice, that if a man borrows money and 
returns it undiminished in volume there is no ethical compul- 
^ for hun to pay more. As a practical matter, it has always 
been recognized in the world of business that if a man fore- 
goes the use of his own money and lends it to another, it is 
proper that he be recompensed. This recompense would vary 
in accordance with: (i) the amount involved, (2) the period 
of the loan, and {3) the risk of loss. When the great govem- 
ments borrow money in time of peace, there is supposed to 
be very little risk and the rate of interest is very low. If 
on the other hand, a man without any other means desires to 
borrow money to start in business, the chances would be that 
the money would be lost and the creditor would feel justified 
«i asking as high a rate of interest as he could legally secure. 
The legal rate is usually 6 per cent. When no agreement is 
inade as to interest, the legal rate governs. In most parts of 
the country parties are allowed to contract for higher rates 
usuaUy Umited to 8 or 10 per cent. When suit is brought on 
a liquidated demand, interest is claimed from the date when 
the claim accrued. In a suit for damages interest does not 
begin till judgment is entered. 

Interest on a claim is generally reckoned from the date 
when due, or if it is a running account, from the time demand 

584 



is made for payment and payment is refused. Sometimes 
when an account has been running, an average due date for 
the time of interest will be allowed. 

§ 513. Discount 

Discount is interest reserved from the face of the loan. 
When banks loan money, they require the party borrowing 
the money to make out a note for the amount payable at the 
expiration of the loan. Then they calculate the interest 
from the face of the loan and subtract it from the amount 
they pay to the debtor. This is charging more than the 
nominal interest because the party does not get in advance the 
full amount on which he pays interest. The banks are allowed 
to do this. A national bank may charge on loans and dis- 
counts any rate allowed by the laws of the state in which the 
bank is situated, and if no rate is there fixed, the bank may 
charge not exceeding 7 per cent. 

A note for $1,000 payable 90 days after date, discounted, 
would yield $985 to the borrower. Therefore he has paid 
in advance the interest on $1,000 and gets the use of only 
$985. Usually the borrower receives credit only to the amount 
of the proceeds, which goes to his account to be drawn on 
as he requires it. The further proceedings relating to the 
transaction have been considered in the part dealing with 
negotiable instruments. The discount procedure would be the 
same, whether the instrument discounted were a note of the 
party, a note in which he was payee, or a draft of which he 
was the owner. 

§514* Usury 

Usury and interest were formerly synon3rmous in meaning. 
All interest was usury and usury was merely a term expressing 
interest. Now in law it means an illegal rate of interest. In 
each state of the Union the law provides for a certain legal 



I 



SB6 



DEBTS AND INTEREST 



INTEREST 



587 



rate of interest and in the absence of any specified rate this 
wiU prevail. In some states it is permitted to make a specified 
contract for a higher rate than the legal one. The penalties 
for violations of the usury laws vary in every state of the 
Union. The legal rate of interest fixed in most states is 6 per 
coit, although in a few states it ranges from 5 to 8 per cent 
Where mterest is provided for but no rate has been fixed, the 
law will presume that the legal rate of interest was intended 
Every busmess man should know the laws in regard to usury 
for his own state. In some states it is provided that the 
excess over the legal rate cannot be collected. In other states 
It IS considered an illegal contract and is therefore void as a 
whole and nothing can be collected. Section 95, 75 U S 
Compiled Statutes says that usurious interest need not be paid 
but the usurer may sue for the principal. Usurious interest! 
If paid, can be sued for in double. 

Pawnbrokers are allowed to charge usurious interest This 
seems unjust as they are amply secured and their patrons are 
in most cases poor and ignorant people. 



interest upon the actual amount due for the actual period dur- 
ing which interest should run." ^ 

§ 516. Partial Payments 

Where there is a note and the debtor has from time to 
time made payments but does not settle the amount in full, 
when the time comes for a final settlement it is sometimes a 
complicated matter to ascertain exactly how much is due. The 
usual rule in most of the states is as follows: "Compute in- 
terest on the principal from date interest begins to run to 
the date of first partial payment and add to principal, then 
deduct payment from that aggregate, but if the payment does 
not amount to as much as the interest, interest is to be com- 
puted on the principal to the next payment or payments, which 
will equal or exceed the interest and the balance is then to be 
added to the principal, and interest thereon added and pay- 
ments deducted as before." * 



§515. Compound Interest 

Compound interest means interest on interest where a debt 
has been running. Compound interest is not usury. The law 
does not favor compound interest, but will allow it in certain 
cases. Where, for instance, the debtor, not being able to meet 
interest payments, agrees that the interest may be added to 
the principal, the agreement will be good. In some states it 
is legal to agree in advance that if interest payments are not 
made when due, the amount shall be added to the principal 
Compound interest will not be allowed by a court of equity 
in any transaction that comes before it for decision. 

"Interest is generally to be so computed as to avoid the 
payment of compound interest, and to secure calculation of 



Review Questions 

1. What is interest? What is discount? 

2. When does the balance of an account stated be^in to draw 

interest ? 
J. What is legal rate in your state? What is maximum rate? 

4. Define usury and state the penalties for it ? 

5. To what extent can the operation of the usury laws be avoided 

by contract in your state? 

6. What is the usual legal rate of interest on ordinary loans of 

money. Are bankers empowered to take a higher rate on 
discounting ordinary paper? 

7. On what loans may a higher rate of interest than 6 per cent 

be taken? 

8. What is compound interest? When is it allowed? 



* 22 Cyc, 1562. 

' Riney v. Hill, 14 Mo. 500. 



S88 
9- 

10. 

II. 



DEBTS AND INTEREST 

What is the law as to computation of interest in regard to time 
in your state? 

What is the rule for calculating interest on a note on which 
partial payments have been made from time to time ? 

What is the general rule for computing interest on an account 
on which payments arc made from time to time when no 
special stipulation has been expressed? 



PART XV 
BANKRUPTCY 



CHAPTER LXXXI 

ASSIGNMENT FOR THE BENEFIT OF CREDITORS 

§ 517. Introductory 

When a man makes the discovery that he is falling behind, 
it too often happens that he loses his head and manages his 
affairs in the worst possible way. A man who is having diffi- 
culty in meeting his engagements should be most careful to 
pay all his small bills. The small creditors are more likely 
to make trouble than the larger ones and are harder to make 
terms with than the men with big claims. The fewer claims 
there are to be dealt with, the easier it is to get time and to 
make terms. Rent, salaries, and all small current bills should 
be carefully paid. In the next place, the larger creditors should 
be treated fairly and openly. Ordinary human nature post- 
pones, and hopes for some unexpected good fortune to come 
at the last moment. It would be wiser in many cases to 
recognize the gravity of the situation betimes and to post the 
larger creditors and to act on their advice. The credit men 
of reputable houses are experts in straightening out involved 
businesses and are much more likely to find a way out than 
the man or men immediately concerned. 

If in such a case there are not a multitude of indignant 
creditors for small amounts, the larger creditors will try first 
to help the debtor pull through, and if that is not possible, 
will be likely to agree to a compromise that will put the 
insolvent on his feet again without the delay, loss, and prej- 
udicial publicity of going through bankruptcy. If there are 
but a few creditors, they may agree to an assignment to 

591 



II 



592 



BANKRUPTCY 



1 



trustees named by them who will settle up the affairs with least 
expense and delay. 

When his creditors are willing, an insolvent man may 
always assign his property to someone for the benefit of his 
creditors, instead of going into bankruptcy. The proceedings 
necessary for an assignment of this nature are prescribed 
by the state laws. The statutes of the state where the insolvent 
resided would have to be consulted, and the prescribed pro- 
cedure closely followed. 

"Voluntary assignments for the benefit of creditors are 
transfers without compulsion of law, by debtors, of some or 
all of their property to an assignee, or assignees, in trust, 
to apply the same, or the proceeds tiiereof, to the payment 
of some or all of their debts, and to return the surplus, if any, 
to the debtor." * 

A general assignment is the transfer of all or substantially 
all of the assignor's property to an assignee ; whereas a partial 
assignment conveys only a portion of the debtor's property. 

A special assignment is a transfer of some specific article, 
directly, to some favored creditor for his exclusive benefit. 

§518. Rights of Debtors 

Generally, any debtor has a right to make an assignment 
of his property. The fact that a debtor is insolvent will not 
be a bar unless there is a statutory provision regarding this. 
Banks, partnerships, corporations, etc., can with certain quali- 
fications make assignments. The practical bar in most cases 
is the fact that making an assignment is an act of bankruptcy 
and some few dissatisfied creditors can at once institute bank- 
ruptcy proceedings. 

In the jurisdictions where a married woman has the same 
individual rights as her husband, she may make an assignment 
and with her husband's consent may assign the community 

> Btmill on AMignineats. Sec 1. 



ASSIGNMENT FOR BENEFIT OF CREDITORS 593 

property belonging to them. A husband may, however, assign 
the community property without his wife's being a party to 
the conveyance. When an assignment is made by an infant 
or an insane person it is voidable but not void. A joint debtor 
cannot assign joint property for the benefit of joint creditors 
unless with the consent of the other joint debtor. 

§ 519. Rights of Creditors 

In order to be a valid assignment there must be a com- 
plete transfer of the title to the property to be assigned. There 
must be no right of redemption in the debtor. A delivery of 
the property in some manner is also a necessity for a valid 
assignment. In real estate a title passes to the assignee only 
upon delivery of the deed. 

In some states the assent of the creditors to an assignment 
acts as a sufficient consideration for such a transaction, but 
where there is no consent there is no consideration so far as 
the creditors are concerned. In that case the property assigned 
may be seized on a legal process by any creditor who has not 
given his consent, or when such consent has not been given 
until after the seizure. 

§ sac. Void Assignments 

There must be no attempt by the debtor to force the con- 
sent of the creditors to an assignment, and any assignment 
so made may be set aside as void in attempting a compromise 
or a composition. Likewise an assignment made by a solvent 
debtor for the purpose of extending time is void. An assign- 
ment, however, will not be void where the debtor was trying 
to save the property from an execution or attachment. 

No assignment, the terms of which will hinder and delay 
the creditors beyond the time that is reasonably necessary to 
carry out its purpose, is valid. An assignment is not valid 



i 



594 



BANKRUPTCY 



i( 



which gives the assignee the power to decide what debts shall 
be paid or which gives him power to prefer certain creditors. 

§531. Rights and Duties of an Assignee 

An assignee should be properly authorized to pay claims 
in such order and priority as they are entitled to be paid by 
law. An assignee will not be responsible for the neglect or 
default of his agents, provided he used reasonable care and 
prudence in selecting them, and in holding them to strict 
responsibility for their acts, and where a covenant has been 
made on the part of the assignee to act justly and faithfully 
in the execution of his duty. An assignee may by the terms 
of the assignment be required to give an accounting from time 
to time. He may also be given the power to hire such clerks, 
agents, etc., as may be necessary for him to carry on the work 
of the assignment and he may pay for such services from the 
property turned over to him for assignment. 

If an assignment demands that creditors file claims with 
the assignee before payment this must be done, and it may 
also require the claims to be presented within a certain time. 
It may also provide that such claims must be proved. An 
assignment, however, cannot provide that creditors shall not 
be paid until an accounting between them and the assignor 
has been approved and the exact amount of the claim has been 
agreed upon. 

A reasonable recompense for the assignee may be provided 
by the terms of an assignment for his services in carrying out 
the assignment. If an exact and certain sum is fixed by 
statute, this sum will be considered to be the recompense pro- 
vided for in the assignment. If, however, the assignment 
fixes exactly the sum to be paid the assignee it will not be 
void, because the court may reduce the amount to that fixed 
in the statutes. 

An assignee must see to the payment of all expenses out 



ASSIGNMENT FOR BENEFIT OF CREDITORS 595 

of the assigned property for preparing assignment, payment 
of any suits arising from the assigning of an estate, attorneys' 
fees, etc. He must not pay any expenses of the debtor in 
defending suits brought by creditors against him or for obtain- 
ing the benefit of bankruptcy or insolvency laws. 

§ $22. Form of the Assignment 

An assignment of real property comes under the provisions 
oi the Statute of Frauds and must therefore be in writing, 
even though it also includes personal property. The form of 
an assignment has little effect on its validity. Where a debtor 
executed an instrument, if he does so with the intention that 
it shall be an assignment, it is good no matter what its form 
or what it is called. Following this rule, chattel mortgages, 
bills of sale, leases, powers of attorney, real estate mortgages, 
etc., have been held to operate as assignments for the benefit 

of creditors. 

It is usually a statutory provision that the name and ad- 
dress of the assignor and the nature of his business must be 
given in the assignment. If, however, the assignment fails 
to state some of these provisions but gives the residence of 
the assignor so that he may be identified, it will be valid. 

The assignee must, with reasonable certainty, be designated 
in an assignment and there must also be a reasonable certainty 
as to the articles of property to be conveyed. There need be 
no valuation of such articles given. The name and addresses 
of the creditor, and amounts, date, and nature of the debt, 
are all that need to be stated on the list of liabilities. One 
seal is sufficient for an assignment where it is required to be 
under seal and is signed in the name of a firm. 

§523. Revocation of Assignment 

"An assignment before delivery to the creditors may be 
revoked, but an assignment which has been delivered cannot 



S96 



BANKRUPTCY 



i 



be revoked without the consent of both the assignee and the 
creditors who have affirmed the trust by filing their bill to 
enforce it, or after the creditors have been notified and have 
manifested their consent, or after the rights of creditors have 
otherwise attached thereunder." " 

Where an assignment gives creditors a certain time for 
consideration and acceptance, the assignor may not revoke the 
assignment before the time allowed has expired. An assign- 
ment is not revoked by death or disability of an assignee 
or by the death of the assignor or the resignation of the 
assignee. A trust will always remain whether there is an 
assignee or not, and in such a case an assignee may be appointed 
to execute the assignment by a court of equity. 

§ 524* Insolvency 

Insolvency is the state of a person who cannot pay his 
debts as they mature. This is the real point of insolvency, 
for though a debtor's estate may amount to much more than 
his debts, yet if he has not money enough on hand to pay 
as the debts come due, he is practically and legally in- 
solvent. 

In insolvency as opposed to bankruptcy, although the 
debtor's property is taken and divided among his creditors 
he still remains liable for the payment of any unsatisfied 
balance remaining due. Apart from this fact, insolvency is 
practically the same in procedure and condition as bankruptcy. 
If an insolvent business can scrape together enough money 
to meet bills as they come due, it can go on indefinitely and 
none of its creditors can institute legal proceedings. It would 
be possible for a skilful business man to start a business on 
borrowed capital, in which case it would be insolvent from 
the start. If his borrowed money did not come due for some 
time, he meanwhile could do business and make money and 

• Corpus Jttn% Voi V, pi|e 1140. 



ASSIGNMENT FOR BENEFIT OF CREDITORS 597 

when his loans came due, pay part and renew the balance until 
he succeeded in accumulating assets in excess of his indebted- 
ness and making the business solvent. 



I. 
2. 

3- 
4. 

5 



Review Questions 

What are the powers of an assignee? How may he resign? 

What is a general assignment? 

When may it be set aside? 

What compensation is allowed an assignee? 

What are preferences in an assignment? 

6. What is an assignee's duty as to accounting? 

7. How must an assignee qualify ? 

8. What is a voluntary assignment for benefit of creditors? 

9. Where a debtor refuses to make an assignment for the benefit 

of his creditors, have the creditors any means of forcing him 

into liquidation? 
Must an assignee perform assignor's contract to deliver goods? 

If assignee has accepted payment on account? 
In an assignment for benefit of creditors, what is the position 

of the assignee, representing such creditors, as to the property 

of the estate? 
May one partner make an assignment for the benefit of the 

firm's creditors? 

13. What is the general personal liability of an assignee for damages 

resulting from his acts or omissions? 

14. If an assignee before distribution has notice of a claim, but 

the creditor has failed to put in proof of claim, though notified 
to do so, may the assignee distribute the estate without 
regard to the claim ? 

15. What is the difference between an assignee and a receiver? 

16. Under what conditions will an assignment for the benefit of 

creditors be set aside? 



ID. 



II. 



12. 



BANKRUPTCY PROCEEDINGS 



590 



il 



I 



I 



CHAPTER LXXXII 

BANKRUPTCY PROCEEDINGS 

§525. Receivership 

There are two kinds of proceedings by which creditors can 
force a closing out of the business of a person who is insolvent 
and who has committed an act of bankruptcy. The first is 
to bring a suit in equity to have a receiver appointed, who 
then takes charge of the business, sells the property, and pays 
off the claims under the direction of the court. 

The difficulty with the suit in equity is, that if any of the 
other creditors prefer to start proceedings in bankruptcy, the 
equity proceeding fails, and all must come in under the bank- 
ruptcy proceeding. 

One of the "acts of bankruptcy" is that the debtor "being 
insolvent, applied for a receiver or trustee for his property, 
or because of insolvency a receiver or trustee has been put 
in charge of his property." 

For the purposes of the bankruptcy law a person is deemed 
insolvent whenever the aggregate of his property (excluding 
any that he has concealed or disposed of to defraud his 
creditors) shall not at a fair valuation, be sufficient in amount 
to pay his debts. 

§ 526. Bankruptcy 

The second method is to go into the federal court and to 
bring bankruptcy proceedings. All bankruptcy proceedings 
must be brought in the United States court. No state court 
has jurisdiction in bankruptcy. 

Bankruptcy is a more serious matter than insolvency and is 

59S 



usually fatal to a business. Bankruptcy means that a man 
or a business has been adjudged by a court to be a bankrupt 
and that control of the business has been put into the hands 
of a trustee or receiver appointed by the court, to make such 
disposition of it as may be for the best interests of the 
creditors. A business is usually insolvent when it goes into 
bankruptcy, but it would be easy to mismanage a solvent busi- 
ness in such a way that it would become bankrupt without 

losing its solvency. 

The bankruptcy laws are enactments of Congress designed 
to afford a means of distributing fairly among creditors the 
assets of a failing business. Before these were adopted the 
law: in each state on the collection of debts differed, and when 
a business house failed there was strenuous competition among 
its creditors to see who could save himself, the result being 
much fraud and unfairness. Now, all of the state procedure 
has been practically superseded by the national laws admin- 
istered by the federal courts, and the result is better for both 
creditors and debtors. 

The great advantage to the debtor is that if he has been 
only unfortunate and not fraudulent, he may after the settle- 
ment of his affairs obtain a discharge from all his past debts 
and start afresh to build up a new credit, with the assurance 
that when he gets a little money it will not at once be taken 
from him on some old claim. 

The advantage to the creditors is that all fare alike, and 
no one is preferred in his claims. The proceedings also give 
pause and opportunity to make a compromise to the advantage 
of all parties. 



Note: 
I. 



An honest debtor who deals fairly with his creditors, 
can usually make a settlement with his creditors 
without bankruptcy proceedings. 



I i 



6oo 



BANKRUPTCY 



BANKRUPTCY PROCEEDINGS 



6oz 



I 



§ 537. Voluntary Bankruptcy 

Any person may file a bankruptcy petition on his own 
initiative asking the court to adjudge him a bankrupt. It is 
immaterial how small the amount the person may owe when 
he makes his appHcation. The expense of the proceedings 
would, however, be an effectual bar to small debtors, and it is 
not usual for anyone to make voluntary application unless 
he is insolvent and is being pressed by creditors. Under such 
circumstances, it is sometimes better for a person, when he 
can see no other way out, to anticipate and by so doing to 
avoid a hopeless struggle against the inevitable. He may 
settle with his creditors as fairly as possible before it is too 
late and endeavor to get a fresh start in life, profiting by his 
experiences. 

In order to go into voluntary bankruptcy, the debtor files 
a petition in the federal court for his district, stating the 
number and amount of his debts and the amount of his 
property. The creditors are then served with notice and with 
copies of the petition, and the further proceedings are the 
same as in cases of involuntary bankruptcy. 

A partnership may be a voluntary bankrupt as may a 
married woman owning property, and likewise a minor. If 
an alien has property within a court's jurisdiction he may 
become a voluntary bankrupt, the requirements of residence, 
place of business and domicile being waived by the provisions 
of the Bankruptcy Act. Any corporation, except a municipal, 
railroad, insurance, or banking corporation, may become bank- 
rupt. 

Instead of going into bankruptcy a debtor may make an 
assignment for the benefit of creditors first. The practical 
difficulty here is that any of his creditors may commence an 
action of bankruptcy if not satisfied with the assignment, and 
the whole matter will then have to be settled in a bankruptcy 
court 



§528. Involuntary Bankruptcy 

A person may be adjudged an involuntary bankrupt when 
he owes not less than $1,000 and has committed an act of 
bankruptcy. The following are the legal acts of bankruptcy: 

1. To convey, transfer, conceal, or remove, or to per- 

mit to be concealed ^r removed, any part of his 
property with intent to hinder, delay, or defraud 
his creditors or any of them. 

2. To transfer while insolvent any portion of his prop- 

erty to one or more of his creditors with intent 
to prefer such creditors over his other creditors. 

3. To suffer or to permit, while insolvent, any creditor 

to obtain a preference through legal proceedings, 
and not have vacated or discharged such prefer- 
ence at least five days before a sale or final disposi- 
tion of any property affected by such preference. 

4. To make a general assignment for the benefit of his 

creditors, or being insolvent to apply for a re- 
ceiver or a trustee for his property, or to have had 
a receiver or a trustee put in charge of his prop- 
erty because of insolvency. 

5. To have admitted in writing his inability to pay his 

debts and his willingness to be adjudged a bank- 
rupt on that ground. 

The person who has committed any such act of bankruptcy 
is liable to have a petition filed against him at any time within 
four months thereafter, asking that he be adjudged a bank- 
rupt. 

§ 529. Persons Who May Bring Bankruptcy Proceedings 

Bankruptcy proceedings may be brought by any one or 
more creditors to whom the alleged bankrupt owes not less 



ii< 



!« 



6oa 



BANKRUPTCY 



BANKRUPTCY PROCEEDINGS 



603 






than $500, if the total number of creditors is less than twelve. 
If there are twelve or more creditors, three or more must join 
in bringing the proceedings and their claims must aggregate 
more than $500. 

§ 530- Persons Who May Become Involuntary Bankrupts 

Bankruptcy proceeding! may be brought against any 
natural person, except a wage-earner or a person engaged 
chiefly in farming, and against any unincorporated company 
and any corporation owing debts to the amount of $1,000 
or oyer, except a municipal, a railroad, an insurance, or a 
banking corporation. A municipal corporation, a railroad, an 
insurance company, or a bank cannot be thrown into bank- 
ruptcy, for reasons of public policy. In event of any of these 
institutions becoming insolvent, creditors can apply to a court 
of equity for the appointment of a receiver to take charge 
of the assets and any business on behalf of the creditors. 



Review Questions 

I. When is a person insolvent? What two proceedings are open 
to creditors in such case? Which is usual? Why? 

a. What is bankruptcy ? What is the result of bankruptcy? What 
are the bankruptcy laws? What courts administer the bank- 
ruptcy laws? What advantage are these to the debtor? To 
his creditors ? 

3. What is voluntary bankruptcy? What is the procedure? May 

a partnership be a voluntary bankrupt ? A corporation ? An 
alien? A minor? Why is voluntary bankruptcy usually chosen 
instead of an assignment? 

4. What is involuntary bankruptcy ? How much must an involuntary 

bankrupt owe? What are the five legal acts of bankruptcy? 
How long after such an act may proceedings in bankruptcy 
be brought? 



5 Who may institute bankruptcy proceedings? How many must 

join? How much must the bankrupt owe them? 

6 Against whom and what may bankruptcy proceedings be brought? 

What persons are excepted ? What corporations are excepted ? 
What can be done in case of the insolvency of a corporation? 



BANKRUPTCY PROCEEDINGS 



60s 



II 



CHAPTER LXXXIII 

BANKRUPTCY PROCEEDINGS (Continued) 

§531- How Bankruptcy Proceedings Arc Instituted 

In bringing bankruptcy proceedings, the creditor or the 
creditors (as the case may be) file a petition in the federal 
court located m the judicial district where the bankrupt re- 
sides or has his place of business, or in a district where any 
property belonging to the bankrupt is located. A copy must 
be served on the bankrupt. 

The petition usually asks for the appointment of a re- 
ceiver to protect the property until a trustee can be elected. 
The receiver is to be appointed by the court and is to be given 
charge of the bankrupt's property until the first meeting of 
creditors is called. 

If the bankrupt defends the proceeding, it will be necessary 
to have a jury trial before the court can pronounce him a 
bankrupt. Proceedings in bankruptcy are usually conducted 
before a referee in bankruptcy appointed by (he court. Usually 
such suits are not defended. After the expiration of the 
twenty days which the bankrupt is given in which to make his 
reply, the court enters a decree adjudging him a bankrupt, 
and appointing a receiver if a receiver is necessary. This 
decree is called an adjudication in bankruptcy. If the in- 
solvency and act of bankruptcy of the alleged bankrupt are not 
shown, the petition is dismissed. 

§533. The Referee 

The referee in any judicial proceeding is an officer ap- 
pointed by the court to investigate and report a decision as 

604 



to some feature of a matter in suit. An accounting is usually 
conducted by a referee. In bankruptcy referees are appointed 
for two years, and each county should have one resident 
referee. Referees should be competent and not related in 
any way to the judges of the federal courts in the districts 
in which they reside and are sworn in as referees. 

The duties of referees are to consider all petitions that 
are referred to them by the clerks of the courts and decide 
whether they should be granted or dismissed; to administer 
oaths to witnesses ; and to demand the production of documents 
required in cases before them. Also they have judicial power 
in taking possession of the bankrupt's property when the 
United States judge is sick, absent, or unable to act. Generally 
they are authorized to act judicially in all such matters as 
arise in the causes before them, except as to compositions 
and discharges. A referee should be skilled in accounting and 
in law, but he must not be interested in the cases before him, 
or practice as a lawyer in bankruptcy proceedings, or purchase 
any property of a bankrupt. He is paid by fees and costs 
attached to the different steps and proceedings in each case. 

§ 533. Procedure 

The bankrupt is then required to file a sworn schedule 
of all his property showing location and value, and a list of 
all the claims against him, giving names, addresses, and 
amounts due each. This schedule is filed in triplicate, one for 
the clerk, one for the referee, and one for the trustee. The 
court may disallow any claims which it believes to be un- 
founded. 

A meeting of all creditors whose claims have been allowed 
is then called, and they elect a trustee to take charge of the 
property. The trustee must be elected by a majority of the 
creditors as to both number and amount. That is, he must 
be chosen by a majority of all the creditors whose claims have 



6o6 



BANKRUPTCY 



BANKRUPTCY PROCEEDINGS 



607 



been allowed, and by those holding a majority in amount of 
the claims. 

Creditors who have some security for their claims are not 
allowed to come in to vote on the bankruptcy proceedings, so 
far as those claims are concerned, unless the security is not 
large enough to cover them. In this latter case they may vote 
on the amount of the claim over and above the value of the 
•ccurity, but not on the full claim. 

The creditors may require the bankrupt to submit to an ex- 
amination as to his property and any other matters pertinent 
to the bankruptcy proceedings. 

S 534- Creditors 

As soon as the trustee has been elected, the creditors should 
proceed to file their claims with him. The proof of a claim 
consists of an affidavit by the creditor stating the nature and 
the amount of the claim, that it is due and owing, and what 
security, if any, he has for it. If it consists of a promissory 
note, or a written instrument, he must file the instrument with 
the affidavit. 

Qaims may be filed at any time within one year after the 
adjudication. In a litigated claim, if final judgment is rendered 
within 30 days before or after such expiration of one year, 
then claim may be filed 60 days after such judgment. If a 
creditor has secured a judgment more than four months before 
the petition was filed, he will retain whatever lien on real 
estate the state allows him. If the judgment came within the 
four months' period it wUl give the creditor no advantage. 

The bankruptcy proceedings are carried through only in 
case the debtor and his creditors can come to no compromise. 
Very frequently the debtor offers to compromise for so many 
cents on the dollar, and if this is a fair offer it is usually better 
to take it than go through with the long and costly procedure 
in bankruptcy. 



Any creditor who thinks that the bankrupt is not offering 
enough may offer to take over the stock himself and to pay 
the other creditors a higher dividend. This usually brings a 
higher offer from the bankrupt if he is trying to defraud his 
creditors. The creditor making the offer must also pay the 
expenses of the proceeding up to the time the compromise is 

made. 

If there has been any fraud in bringing the proceedmgs, or 
in concealing property which ought to have been given up for 
the benefit of creditors, any of the defrauded creditors may 
come in within one year after a discharge has been granted 
and have it revoked. 

Note: 

I. It is generally better to compromise instead of con- 
tinuing a bankruptcy proceeding if the offer is 
at all a fair one. The creditors practically never 
receive a larger proportion of their claims by de- 
lay ; usually, because of the heavy expenses, they 
receive much less than if they had settled the mat- 
ter in the first place. 

§ 535. Rights and Duties of Receiver 

In bankruptcy proceedings when it is absolutely necessary 
to prevent loss a receiver is appointed temporarily to preserve 
the property until a trustee can be elected by the creditors. 
He does not conduct the business unless so directed, but 
merely takes care of the goods, pays taxes and other dues, 
and hires a caretaker, if necessary, to look after the premises 
during the interim between the commencement of the action 
and the election of the trustee. If there are any goods in 
stock which are of a perishable nature or would soon go out 
of style and become unsalable, the receiver may, with the 
court's permission, sell these and deposit the money realized 



6o8 



BANKRUPTCY 



BANKRUPTCY PROCEEDINGS 



609 



in a bank to await the election of a trustee. It is the receiver's 
duty to apply to the court for such permission. 

The receiver is appointed by the court and must give a 
bond for the faithful performance of his duties. He is en- 
toUrf to fees based on a percentage of the amount of property 

§536- Rights and Duties of Trustee 

The trustee is elected by the creditors to take over the 
bankrupt s property, to reduce it to cash, to pay off all charges 
and then to distribute the remainder among the creditors as 
provided by law. The trustee may be a person or a corporation 
authorized to act in that capacity and with an office in the 
judicial district. 

pe trustee must give a bond, the amount of which is fi.xed 
by the creditors at their meeting, or if they fail to do so by 
aie court. The creditors may at any time require that this 
bond be increased. The bond must have two sureties The 
trustee is responsible only for his own misdeeds, not for any- 
thing which the bankrupt does. 

The trustee's first duty on his appointment is to get to- 
gether all the property of the bankrupt, to collect any debts 
owing to him, by suit if necessary, and to turn everything into 
money in the quickest manner possible, without unduly sacri- 
ficing the assets. As a general rule, if the property of the 
tenkrupt IS in the form of a business, it is necessary to keep 
the busmess running for some time in order to realize as much 
as possible. 

It is the trustee's duty to conduct this business in what- 
ever manner he considers most advantageous, and to sell the 
property for the best price he can obtain. The trustee must 
dispose of aU leases, and everything else owned by the bank- 
rupt, except the property exempted from the claims of 
creditors by the state laws. 



From the receipts he would pay taxes due, cost of preserv- 
ing the estate, filing fees, court costs, an attorney's fee, and 
wages due. Servants and employees for three months prior 
to proceedings are entitled to be paid before other claims are 
settled. Then he would discharge any secured debts, to the 
value of the security. 

The order of priority of claims is as follows: 

1. Taxes due. 

2. Costs of preserving the property after petition was 

filed. 

3. Filing fees paid by creditors and costs of reclaiming 

property. 

4. Costs of bankruptcy proceedings. 

5. Wages due workmen, clerks, and salesmen earned 

three months prior to filing petition, up to $300 
to each claimant. 

6. Debts having priority by laws of state. 

7. General claimants are paid dividends as the estate 

is liquidated. 

If after paying these items there remains enough to pay 
5 per cent of the total amount of all the other claims, the 
creditors are entitled to have a dividend declared within thirty 
days after the debtor has been adjudicated a bankrupt. If 
not, they must wait until the trustee has collected a sufficient 

amount. 

Afterwards the creditors are entitled to have dividends 
declared from time to time until the entire amount of all the 
property in the trustee's hands has been paid out. This may 
be a tedious process. 

When he has distributed the final dividend, the trustee 
makes up his accounts and presents them to the court asking 
a discharge. He is then entitled to fees based on the value of 
the property which has gone through his hands. 



n 



6io 



BANKRUPTCY 



§ 537* Rights and Duties of Bankrupts in Bankruptcy Pro- 
ceedings 

It is the duty of the bankrupt to submit to examination if 
his creditors require it, to hand over to the trustee in bank- 
ruptcy all property in his possession, with the exception of 
what he is entitled to claim as exempt, and to give full in- 
formation of all his affairs in order to aid the trustee in 
straightening out matters. 

The bankrupt may offer to compromise the claims against 
him by paying a certain amount on the dollar. He must file 
a list of all his property and aU the claims at the same time 
If a majonty of his creditors, who also hold a majority in 
amount of the claims against him, sign a written consent to 
the compromise and the court approves it, the claims wiU then 
be compromised and the bankruptcy proceedings dismissed 
Where a compromise is arranged, the bankrupt must pay the 
expenses of the proceedings up to the time of the arrangement 
A bankrupt cannot be subjected to arrest for any claim in- 
volved in the bankruptcy proceedings, except for contempt of 
the court having charge of the proceeding or for attempting 
to escape from its jurisdiction so as to avoid an examination. 
He IS entitled to claim as exempt such property as the state 
law allows him. This usually consists of necessary household 
furmture and wearing apparel and such tools as are necessary 
for carrying on a trade. 

When the bankrupt has given an honest account of all his 
debts and belongings, and has done all in his power to aid the 
proceedings, he is entitled to a discharge. This relieves him of 
the legal obhgation to pay in full any of the debts which were 
included in the proceedings in bankruptcy. He cannot be pro- 
ceeded against at law unless he acknowledges in writing that 
such debts are stiU due and owing. But the moral obligation 
to pay them still remains, and if at any future time he finds 



BANKRUPTCY PROCEEDINGS 



6ll 



himself able, he should feel in honor bound to pay the remain- 
ing amounts due. 

It is important that the bankrupt should apply for his dis- 
charge within the year after filing his petition, or his right is 
gone forever, and he will still be liable for the full amount of 
his debts. 

Notes: 

1. Honesty is always the best policy in bankruptcy 

proceedings. 

2. A fair compromise should alv/ays be accepted. 

§ 538. Preferred Creditors 

Any preference shown to any creditor the effect of which 
is to give the favored creditor all or a greater percentage of 
his claim than the others of the same class, will be set aside. 
The trustee may go back four months prior to the filing of 
the petition in bankruptcy, and scrutinize any payment, assign- 
ment, or transfer of goods or judgments taken against the 
bankrupt. The voidable preferences are those to creditors. 
The test is whether by such action the favored creditor re- 
ceived a larger percentage of his claim than other creditors 
of the same class. The bankrupt must have been insolvent 
when he made the preferences. The favored party must "have 
had reasonable cause to believe that the debtor was insolvent." 
The trustee must bring suit to set aside the preference, for 
the transaction is "voidable," not "void." 



Review Questions 

1. What courts have jurisdiction in bankruptcy? Where do these 

courts get their authority ? What is the first step in bankruptcy 
proceedings ? 

2. For what purpose is a receiver appointed in bankruptcy proceed- 

ings? Who appoints the receiver? What is an adjudication 
in bankruptcy? 



6l2 



BANKRUPTCY 



la. 






3. What arc the functions of a referee in bankruptcy? Who ap- 

points referees? 

4. What is the jurisdiction and power of a referee in bankruptcy 

and what compensation is he entitled to? ' 

5. After adjudication what is the next step? What must the bank- 

rupt's schedules contain? 

6. What is the object of the meeting of creditors ? What is neces- 

sary to the election of a trustee? What voting right has a 
secured creditor ? 

7. When do creditors file their claims? What is the usual proof 

of a claim? How long after the adjudication may claims be 
filed? If a creditor has secured a judgment does it give him 
any advantage? On what property of a debtor is a judgment 
a lien in your state? 

a What is the effect of a compromise? If a creditor objects to 
compromise offered by bankrupt, what can he do ? 

9^ What is the duty of a receiver on taking possession of property? 
What should a receiver do with trust funds in his possession? 
What are the duties of a trustee in bankruptcy? How is he 

appointed? In what order must he pay claims? 
Who can require the examination of a bankrupt? Who may 
accept a compromise? Can a bankrupt be arrested for any 
claim while bankruptcy proceedings are pending? What must 
he do to claim a discharge? When must a bankrupt apply 
for his discharge? 

What constitutes a preference under the Bankrupt Act as to 
payments to creditors? 

Is any payment of money by a debtor to his creditor within four 
months of bankruptcy open to attack as a fraudulent prefer- 
ence? A debtor executed a chattel mortgage in favor of a 
money lender in consideration of a present cash advance 
which, to the money lender's knowledge, was intended to be 
and was paid to a creditor. Is the chattel mortgage valid 
as against the other creditors? 
A trader in insolvent circumstances sold his stock in trade and 
deposited the purchase money to the credit of his account 
in bank. At the time an overdue note of his was held by 
tile bank and he gave the bank a check to cover the same. 
Three months later he was bankrupt. Is such payment a 
preference and therefore to be set aside? 



10. 



II. 



CHAPTER LXXXIV 



DISCHARGE IN BANKRUPTCY 

§539. Discharge of a Bankrupt 

The advantage of bankruptcy proceedings to the bankrupt 
is that one month after being adjudged a bankrupt he may 
ask the court for his discharge. The judge will hear the 
application and will hear the trustee or other parties in interest 
in opposition. After hearing the application, the judge will 
discharge the applicant, unless it is shown: 

1. That he has committed an offense for which he 

could be imprisoned. 

2. That he has destroyed, concealed, or failed to keep 

books from which his financial condition might 
be ascertained. 

3. That he obtained money or property on credit by 

a materially false statement in writing. 

4. That he has removed, destroyed, or concealed or 

permitted others to remove, destroy, or conceal 
any of his property, to hinder, delay, or defraud 
his creditors, within four months prior to his 
bankruptcy or during the proceedings. 

5. That he has had a discharge in voluntary bankruptcy 

within the six months prior. 

6. That in the proceedings he has refused to obey any 

lawful order of, or to answer any material ques- 
tion approved by the court. 

The trustee would not be allowed to fight the bankrupt's 
discharge unless a creditors* meeting authorized such action. 

613 



6i4 



BANKRUPTCY 



In cases where the bankrupt has failed honestly, there is not 
usually opposition to his discharge and he is then free to begin 
business again hampered only by impaired credit, the natural 
result of his miscalculations. 



§ 540. What Debts Remain Undischarged 

After a discharge in bankruptcy, the bankrupt still remains 
under obligation to pay any debts which were not due at the 
time of the discharge. He is still liable for rent on a lease 
not yet expired which falls due after the discharge in bank- 
ruptcy. It is the trustee's duty to sell such a lease if possible, 
but the bankrupt remains liable to the landlord in case the 
purchaser f aOs to pay. 

The bankrupt should take care to include all debts due in 
the list which he files, because any debts not mentioned there 
remain valid claims against him after his discharge. Of 
course, if the creditors come in themselves and prove their 
claims in the proceedings, the bankrupt is then no longer liable. 
Also, these creditors may have a right to have the pro- 
ceedings set aside. 

There are certain claims which the law provides that a 
proceeding in bankruptcy shall not discharge. It does not 
cover taxes, nor the duty to support wife and children. Nor 
does it release the bankrupt from claims against him because 
of injuries to other people or because of fraud or wrongful 
acts. If a bankrupt's wife has divorced him, it does not re- 
lease him from his duty to pay alimony. It does not discharge 
debts of a fiduciary who misappropriated collections, as an 
attorney who thus robs his client. Partial payments on a 
debt discharged by bankruptcy will not revive the entire debt. 

Note: 

I. No forms on bankruptcy are given because of the 
number of them and in either voluntary or in- 



DISCHARGE IN BANKRUPTCY 



615 



voluntary bankruptcy the services of a lawyer 
would be needed. Complete series of such forms 
may be obtained at any legal stationer's. 



Review Questions 

1. What is the effect of a discharge in bankruptcy? What are the 

causes that may prevent a discharge ? 

2. What debts would remain against a bankrupt after his discharge ? 

If the bankrupt has failed to list certain debts, what is the 
effect ? 

3. Will the discharge in bankruptcy of a surety release him from 

contribution to a cosurety who subsequently pays the debt? 

4. A being in financial difficulties, his creditors, with the exception 

of B, agree to accept 50 cents on the dollar. As an inducement 
to B, A secretly agrees to give him 75 cents. B accepts. What 
rights has B against A, and what effect does this contract have 
on the whole transaction? 



I 111 



PART XVI 



BAILMENTS AND COMMON CARRIERS 



CHAPTER LXXXV 

BAILMENT 

§ 541. What Is Meant by Bailment 

A bailment is a delivery of personal property to one person 
by another person to be used or kept for some particular 
purpose and to be returned thereafter. The person to whom 
the property is given or delivered is known as the "bailee" 
and the person making the delivery as the "bailor." Bailment 
is distinguished from a gift or a sale by the fact that, although 
delivery is made, title does not pass. Unless, however, the 
property so delivered is, by the express or the implied agree- 
ment of the parties, to be returned, the transaction is usually 
viewed as a gift or a sale. But if the agreement is that the 
property is to be returned, even though in a different form, 
it will be considered a bailment. 



§542. Kinds of Bailment 

There are two general classes of bailment. These are: 
(i) bailments for the benefit of one party, and (2) bailments 
for the benefit of both parties. 

Bailments for the sole benefit of one party are known as 
gratuitous bailments, and there are two subdivisions: (i) 
bailments for the sole benefit of the bailor, and (2) bailments 
for the sole benefit of the bailee. 

Bailments for the benefit of both parties are divided into : 
(i) pledge or pawn, (2) the use of a thing for hire, and (3) 
hired services about a thing. 

These classes are again divided as shown by the following 

summary: 

619 



620 BAILMENTS AND COMMON CARRIERS 

1. Bailments for sole benefit of the bailor: 

(a) Mandate or mandatum} 

(b) Deposit or depositum. 

2. Bailments for the sole benefit of the bailee: 

(a) Loan without charge or commodatum, 

3. Bailments for the joint benefit of both parties: 

(a) Pawn, pledge, or pigntis, 

(b) Hiring of a chattel or locatio ret. 

(c) Delivery of a chattel to have something 

done to it or about it: 

( 1 ) Delivery for custody or care. 

(2) Delivery for work or services upon. 

(3) Delivery for carrying or transport. 



§ 543- Mandate and Deposit 

In these cases the bailee is not paid for what he does. 
A goes off for a vacation, and asks a neighbor to take charge 
of a box of silverware. The neighbor does not have to do 
this and might properly suggest that a safe-deposit company 
would be safer. If the neighbor does take the box he is 
bound to take care of it. If he is careless and because of 
such lack of care the box is stolen, he will be liable to A for 
its value. The kindly neighbor is not obligated to take the 
greatest care, but if he undertakes the care of it at all he must 
take ordinary care and precaution. 

A man who finds a lost article, or some property left with 
him by mistake is a gratuitous bailee, and must not be guilty 
of negligence in caring for the property. 

Mandatum and depositum are of rare occurrence. In a 
simpler state of society a man was often asked to put a 
neighbor's gun in order or to break in his colt, or to take care 
of something for him, but that day is past. 



'The iuUctxed words are the Roman law terms. 



BAILMENTS 



621 



§ 544. Commodatum or Loan 

When a man borrows any article of personal property he 
is a bailee for his own benefit and must take the greatest care 
of the article, and if it is lost, injured, or stolen he is liable 
for the least lack of care or slightest negligence. On the other 
hand, if the loss or damage occurs when he has taken all 
precautions, he is not legally liable for the loss. If a man 
borrows a diamond pin, wears it carefully, and at night puts 
it in a small safe from which it is stolen by burglars, he cannot 
legally be held for its value. 



§ 545. Pledge or Pawn 

A pledge is a transfer of the chattel as security for the 
payment of a debt or the fulfilment of some other obligation. 
A person who makes a business of loaning money on the 
pledge of personal property is called a pawnbrolcer. It is not 
oiften that ordinary chattels are given as pledges except in 
transactions with pawnbrokers. But it very often happens 
that bills, notes, stocks, and bonds are used as security for 
money borrowed. In such cases the term "collateral security" 
is generally used. Where personal property is used as security 
for a debt, it is usual to give a chattel mortgage. 

A pledge may be the result of a written contract, but it 
may be made merely by transferring the property. In the 
latter case the pledge will remain in force so long as the pledgee 
retains possession of the property. 

To make a valid pledge, delivery is absolutely necessary. 
Bills, notes, and corporate stocks must be indorsed in blank 
when used as collateral security. In this case some writing 
should accompany the pledge in order to define its terms and 
to prevent misunderstandings. A pledge of stock is usually 
made by simply depositing the certificate indorsed in blank 
with the pledgee. In the case of corporate stock, the pledgee 



622 



BAILMENTS AND COMMON CARRIERS 



BAILMENTS 



623 



may have the stock transferred on the books of the company 
and new certificates issued in his own name. 

In most cases where collateral security is given, it is 
provided that if the debt is not paid when due the pledgee 
may sell the security and, after paying expenses of the sale 
and the debt secured, turn over any surplus to the pledgor. 
In such cases the pledgee, even though given the right to sell 
at a private sale without notice, would gain greater security 
by giving notice and selling at public sale, the notice given to 
be a formal notice in writing, specifying the time and the place 
of the sale. In many states sales of pledged property are 
regulated by the laws. 

In general, the pledgor, upon discharge of his obligation, 
is entitled to the return of the specific property pledged, but 
corporate stock has a diiferent standing, and if no special 
agreement has been made, the pledgee is not liable for its 
conversion by reason of his sale or other disposition of the 
certificates delivered to him so long as he keeps at all times 
an equal number of shares of the same class and value to be 
delivered to the pledgor upon discharge of his obligation. 

§ 546. Hiring of a Chattel 

This is a bailment for mutual benefit. Property is delivered 
to a bailee to be used by him, paid for by him and returned. 
If A hires an automobile, he must use it with care and skill 
and pay for its use. If an accident occurs despite his care 
and skill, he is not liable to the bailor. If he lacked skill or 
let someone who lacked skill operate it, or if he was careless 
or, reckless, he would be liable to the bailor. If the accident 
happened by reason of defects in the automobile, the bailee 
would not be liable to the bailor. 

If the bailee hired the automobile for one day or for a 
certain trip and kept it longer or went further, he might make 
himself liable for any damage, whether he was at fault or not. 



If the bailee injures a